Explicit construction of a dynamic Bessel bridge of dimension 3

Luciano Campi (1, 2) , Umut Cetin (3) , Albina Danilova (4)

1 FiME Lab - Laboratoire de Finance des Marchés d'Energie
2 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
3 Department of Statistics, LSE
4 LSE - Department Mathematics [London]

Given a deterministically time-changed Brownian motion $Z$ starting from $1$, whose time-change $V(t)$ satisfies $V(t) > t$ for all $t\geq 0$, we perform an explicit construction of a process $X$ which is Brownian motion in its own filtration and that hits zero for the first time at $V(\tau)$, where $\tau := \inf\{t>0: Z_t =0\}$. We also provide the semimartingale decomposition of $X$ under the filtration jointly generated by $X$ and $Z$. Our construction relies on a combination of enlargement of filtration and filtering techniques. The resulting process $X$ may be viewed as the analogue of a $3$-dimensional Bessel bridge starting from $1$ at time $0$ and ending at $0$ at the random time $V(\tau)$. We call this {\em a dynamic Bessel bridge} since $V(\tau)$ is not known in advance. Our study is motivated by insider trading models with default risk.

Domains: Probability [math.PR]

Luciano Campi, Umut Cetin, Albina Danilova. Explicit construction of a dynamic Bessel bridge of dimension 3. 2010. ⟨hal-00534273⟩