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First-passage time density for a level x above zero

Question

A standard Wiener process starts at 00. Let TxT_x be the first time it reaches the level x>0x>0. Find the probability density of TxT_x and its expected value.

Short answer

f(t)=x2πt3e−x2/(2t)f(t)=\dfrac{x}{\sqrt{2\pi t^3}}e^{-x^2/(2t)} for t>0t>0, and E[Tx]=∞\mathbb{E}[T_x]=\infty. The reflection principle gives P[Tx≤t]=2 P[Wt≥x]=2(1−Φ(x/t))\mathbb{P}[T_x\le t]=2\,\mathbb{P}[W_t\ge x]=2\big(1-\Phi(x/\sqrt t)\big); differentiating in tt yields the density. The level is hit with probability 11, but the density decays only like t−3/2t^{-3/2}, so the mean is infinite.

Adapted from Zhou, A Practical Guide to Quantitative Finance Interviews, sec. 5.4 Brownian Motion and Stochastic Calculus, 'Stopping time B', p.131; question and answer rewritten by SelfMadeQuant.com.

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