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SDE for X when its reciprocal is a GBM

Question

A positive process XX has reciprocal Y=1/XY=1/X obeying dYt=Yt(2 dt−dBt)dY_t=Y_t(2\,dt-dB_t), with BB standard Brownian motion. Then XX obeys dXt=Xt(a dt+b dBt)dX_t=X_t(a\,dt+b\,dB_t) for integers a,ba,b. What is abab?

Short answer

−1-1. Apply Ito to f(y)=1/yf(y)=1/y: dX=−Y−2dY+Y−3d[Y,Y]dX=-Y^{-2}dY+Y^{-3}d[Y,Y] with d[Y,Y]=Y2dtd[Y,Y]=Y^2dt. This gives dX=X(−2 dt+dB)+X dt=X(−dt+dB)dX=X(-2\,dt+dB)+X\,dt=X(-dt+dB), so a=−1a=-1, b=1b=1.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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