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:

γ(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, σ 2 ) = N (0, σ 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 (µ, σ 2 ) then aX ∼ N (aµ, a2 σ 2 ), so with a = √12 and σ 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 .