2 Brownian motion

1. Let Z denote a standard

Normal random variable. Give the distribution
of the process Ut = Z t. Show that for any time t, the distribution of
Ut is the same as that of the Brownian motion Bt , but the process Ut is
not a Brownian motion. Sketch a graph of Ut as a function of t.
Solution
Using that aZ N (0, a2 ), Ut N (0, t). This is the same distribution
as B(t) for any fixed t. But increments of the process U (t)are not
independent: for t1< t2< t3 < t4 , U (t2 ) U (t1 ) = Z( t2 t1 ) and
U (t4 )U (t3 ) = Z( t4 t3 ), are clearly dependent on the same random
variable Z.
Alternatively,

Cov(U (t4 ) U (t3 ), U (t2 ) U (t1 )) = Cov(Z( t4 t3 ), Z( t2 t1 ))

= ( t4 t3 )( t2 t1 )V ar(Z) 6= 0,
thus the increments are correlated and therefore not independent.

2. Using Excel, generate the values of Brownian motion at points ti = i/100,

i = 0, . . . 100 and plot them. Hint: use the fact that increments of Brow-
nian motion are independent and Normally distributed, B(ti+1 )B(ti ) =

Zi ti+1 ti , where Zi is a sequence of standard Normal variables.
Solution
In the first cell of A column write =rand(). This gives U (0, 1) r.v. In
the first cell of B column write =Normsinv(A1), where A1 is the first
cell of A to get N (0, 1) r.v. In C1 use =B1*0.1 to have N (0, 0.01).

Note ti+1 ti = 0.1. Simulation of the Brownian motion is given by
the cumulative sums of the C column. Enter 0 in D1, then in D2 write
=D1+C1. Dragging down 100 places gives the path.

3. Define Vt = 2Bt + 3t, where Bt is a Brownian motion. Find the mean

and covariance functions of the process Vt .
Solution
The mean function:

E(Vt ) = E(2Bt + 3t) = 2E(Bt ) + 3t = 2 0 + 3t = 3t.

The covariance function:

(s, t) = Cov(Vs , Vt )
= Cov(2Bs + 3s, 2Bt + 3t)
 = 4Cov(Bs , Bt ) + 6Cov(Bs , t) + 6Cov(s, Bt ) + 9Cov(s, t)
= 4 min(s, t) + 6 0 + 6 0 + 9 0
= 4 min(s, t)

where Cov(Bs , Bt ) = min(s, t) by Theorem 8 on p.14, and the other

terms are zero as covariance of a random variable with a non-random
number.

4. Bt is a Brownian motion.

(a) Show that the process Wt = Bt is also a Brownian motion.

(b) Show that the process Ut = 1 B2t is also a Brownian motion.
2
(c) Shwo that the process Vt = Bt+1 Bt is a Brownian Motion

Solution
(a)
Independence of increments: for s < t

Wt Ws = Bt (Bs ) = Bt + Bs = (Bt Bs ).

It is independent of Bu , u s. Hence also of Bu = Wu .

Since Bt Bs N (0, t s), and N (0, 2 ) = N (0, 2 ), Wt Ws
N (0, t s) = N (0, t s).
As Bt is continuous, so is Bt = Wt .
(b)
We want to show that Ut Us is independent of Uu with 0 u s t.
We can express Ut Us and Uu in terms of Bt Bs and Bu :
1 1
Ut Us = B2t B2s
2 2
1
= (B2t B2s )
2
B2t B2s is the increment of Brownian motion over time interval [2s, 2t]
therefore it is independent of any value of Brownian in at the time preced-
ing 2s. Since for u < s, 2u < 2s, it follows that B2t B2s is independent
of B2u .
For the Gaussian increments, Ut Us = 12 (B2t B2s ). We know that
Bt Bs N (0, t s), so B2t B2s N (0, 2t 2s). But we also have if
X N (, 2 ) then aX N (a, a2 2 ), so with a = 12 and 2 = 2t 2s,
we obtain Ut Us N (0, t s) as desired.
 For the continuity, note that B2t is the composition of two continuous
functions: the function Bt and the function 2t. Because the composition
of continuous functions is again continuous and multiplying a continuous
function by a constant gives a continuous function, we have Ut = 12 B2t
is continuous.
(c)
Vt Vs = Bt+1 Bs+1 is independent of Vs = Bs+1 B1 . From the
properties of Brownian Motion, Bt+1 Bs+1 is independent of Bu for
u s + 1. So Bt+1 Bs+1 is independent of B1 and independent of Bs+1 .
Hence it is independent of Bs+1 B1 .
For the Gaussian increments, Vt Vs = Bt+1 Bs+1 N (0, (t+1)(s+1))
so Vt Vs N (0, t s).
Finally, for a continuous function f (x) and constants a and b, f (x+a)+b
is also continuous. So because Bt is continuous and B1 a constant (in
the sense that for a given path once B1 is observed its value does not
change) we have that Vt = Bt+1 B1 is continuous too.

5. Let B1 (t) and B2 (t) be independent

Brownian motions, and define
W (t) = (B1 (t) + B2 (t))/ 2.

(a) Show that W (t) is also a Brownian motion.

(b) Find the covariance between W (t) and B1 (t).

Solution (a)
First independence of increments. We can express W (t) W (s) in terms
of the independent Brownian motions:
1 1
W (t) W (s) = (B1 (t) + B2 (t)) (B1 (s) + B2 (s))
2 2
1 1
= (B1 (t) B1 (s)) + (B2 (t) B2 (s))
2 2
and W (u) = 12 B1 (u) + 12 B2 (u). By independence of increments of
each Brownian motion, B1 (t) B1 (s) is independent of B1 (u) for u s.
Since Brownian motions are independent of each other B1 (t) B1 (s) is
independent of B2 (u) (for any u). Hence B1 (t) B1 (s) is independent
of W (u). Similarly B2 (t) B2 (s) is independent of W (u). Therefore
W (t) W (s) is independent of W (u).
For the Gaussian increments, we have that B1 (t)B1 (s) and B2 (t)B2 (s)
have N (0, t s) distribution. Because they are independent their sum
has N (0, 2(t s)) distribution. Hence W (t) W (s) has 12 N (0, 2(t s))
distribution, which is the same as N (0, t s) as desired.
 Finally, we note that the sum of continuous functions is continuous and
that a continous function multiplied by a constant is continuous. So
W (t) is continuous.
(b)
We use property of bilinearity of covariance
1
Cov(B1 (t), W (t)) = Cov(B1 (t), (B1 (t) + B2 (t)))
2
1 1
= Cov(B1 (t), B1 (t)) + Cov(B1 (t), B2 (t))
2 2
1
= V ar(B1 (t)) + 0 (due to independence of B1 , B2 )
2
1
= t + 0 (because B1 (t) N (0, t)).
2

6. Show that the process Bt3 is not a Brownian Motion

Solution
There are a number of ways of showing this, here we look at showing
that the independence of increments does not hold. Alternatively one
can show that the power 3 of a Normal distribution is not a Normal
distribution.
We have algebraic decomposition:

a3 b3 = (a b)(a2 + ab + b2 )

therefore the increment of the process B 3 between times s and t is

Bt3 Bs3 = (Bt Bs )(Bt2 + Bt Bs + Bs2 ).

Although Bt Bs is independent of Bs (and hence Bs3 ), Bt2 , Bt Bs and

Bs2 are not independent of Bs3 . Hence Bt3 Bs3 is not independent of Bs3 .