Mathematical Modeling in Finance with Stochastic Processes

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174 CHAPTER 5. BROWNIAN MOTION


5.4 Transformations of the Wiener Process


Rating


Mathematically Mature: may contain mathematics beyond calculus with
proofs.


Section Starter Question


Suppose you know the graphy =f(x) of the functionf(x). What is the
effect on the graph of the transformationf(x+h)−f(h)? What is the
effect on the graph of the transformationf(1/x)? Consider the function
f(x) = sin(x) as an example.


Key Concepts



  1. Three transformations of the Wiener process produce another Wiener
    process. The transformations are scaling, inversion and translation.
    These results prove especially helpful when studying the properties of
    the sample paths of Brownian motion.


Vocabulary



  1. Scaling, also calledre-scaling, is the transformation off(t) tobf(t/a),
    which expands or contracts the time axis (asa >1 ora <1) and ex-
    pands or contracts the dependent variable scale (asb >1 orb <1).

  2. Translation, also calledshiftingis the transformation off(t) tof(t+
    h) or sometimesf(t) tof(t+h)−f(h).

  3. Inversionis the transformation off(t) tof(1/t). It “flips” the inde-
    pendent variable axis about 1, so that the interval (0,1) is “inverted”
    to the interval (1,∞).

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