Distribution of Stopped Wiener Process with Stochastic Volatility

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Let $(W_s)_s geq 0$ be a Wiener process and $tau$ be a random variable with an exponential distribution with parameter $lambda$. Suppose that $W$ and $tau$ are independent. In this question, we see that the distribution of the stopped Wiener process $W_tau$ corresponds to a Laplace distribution with scale parameter $fracsigmasqrt2lambda$ where $sigma$ is the instantaneous variance of the Wiener process.



Suppose now, that the variance $sigma^2$ also follows a stochastic process such that we have:
$$dS = sigma SdW_s \
dsigma^2 = alphasigma^2dt + xisigma^2dW_sigma$$
where $alpha$ and $xi$ are independent of $S$ and $dW_s$ and $dW_sigma$ are independent Wiener processes.



My aim is to derive the distribution of $log S_tau$.



First, if $barV_T$ denotes the mean variance over some time interval $[0,T]$ defined by
$$barV_T = frac1T intlimits_0^Tsigma^2(t)dt,$$
it is easy to show (Lemma of Îto) that
$$log S_T = log S_0 - barV_TT/2 + intlimits_0^TsqrtbarV_TdW_3 $$
where $W_3$ is a Wiener process.
Making use of the answer provided here I get for the characteristic function of the stopped Process $log S_tau$:



$$varphi_S_tau^b, sleft(uright) = Eleft( e^iu S_tau right) \
= Eleft( Eleft( e^iuS_tau midtau right)right) \
= Eleft( e^iubarV_tautau/2-tauleft(barV_tauright)u^2/2 right) \
=lambda int_0^infty e^-lambda + iubarV_tautau/2-tauleft(barV_tauright)u^2/2 , dtau.
$$
Here I am stuck as I do not see how to integrate $barV_tau$ over $tau$..is there any way to represent the distribution of the stopped Wiener Process $log S_tau$ as a function of $barV_tau$?







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    Let $(W_s)_s geq 0$ be a Wiener process and $tau$ be a random variable with an exponential distribution with parameter $lambda$. Suppose that $W$ and $tau$ are independent. In this question, we see that the distribution of the stopped Wiener process $W_tau$ corresponds to a Laplace distribution with scale parameter $fracsigmasqrt2lambda$ where $sigma$ is the instantaneous variance of the Wiener process.



    Suppose now, that the variance $sigma^2$ also follows a stochastic process such that we have:
    $$dS = sigma SdW_s \
    dsigma^2 = alphasigma^2dt + xisigma^2dW_sigma$$
    where $alpha$ and $xi$ are independent of $S$ and $dW_s$ and $dW_sigma$ are independent Wiener processes.



    My aim is to derive the distribution of $log S_tau$.



    First, if $barV_T$ denotes the mean variance over some time interval $[0,T]$ defined by
    $$barV_T = frac1T intlimits_0^Tsigma^2(t)dt,$$
    it is easy to show (Lemma of Îto) that
    $$log S_T = log S_0 - barV_TT/2 + intlimits_0^TsqrtbarV_TdW_3 $$
    where $W_3$ is a Wiener process.
    Making use of the answer provided here I get for the characteristic function of the stopped Process $log S_tau$:



    $$varphi_S_tau^b, sleft(uright) = Eleft( e^iu S_tau right) \
    = Eleft( Eleft( e^iuS_tau midtau right)right) \
    = Eleft( e^iubarV_tautau/2-tauleft(barV_tauright)u^2/2 right) \
    =lambda int_0^infty e^-lambda + iubarV_tautau/2-tauleft(barV_tauright)u^2/2 , dtau.
    $$
    Here I am stuck as I do not see how to integrate $barV_tau$ over $tau$..is there any way to represent the distribution of the stopped Wiener Process $log S_tau$ as a function of $barV_tau$?







    share|cite|improve this question






















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      down vote

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      down vote

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      Let $(W_s)_s geq 0$ be a Wiener process and $tau$ be a random variable with an exponential distribution with parameter $lambda$. Suppose that $W$ and $tau$ are independent. In this question, we see that the distribution of the stopped Wiener process $W_tau$ corresponds to a Laplace distribution with scale parameter $fracsigmasqrt2lambda$ where $sigma$ is the instantaneous variance of the Wiener process.



      Suppose now, that the variance $sigma^2$ also follows a stochastic process such that we have:
      $$dS = sigma SdW_s \
      dsigma^2 = alphasigma^2dt + xisigma^2dW_sigma$$
      where $alpha$ and $xi$ are independent of $S$ and $dW_s$ and $dW_sigma$ are independent Wiener processes.



      My aim is to derive the distribution of $log S_tau$.



      First, if $barV_T$ denotes the mean variance over some time interval $[0,T]$ defined by
      $$barV_T = frac1T intlimits_0^Tsigma^2(t)dt,$$
      it is easy to show (Lemma of Îto) that
      $$log S_T = log S_0 - barV_TT/2 + intlimits_0^TsqrtbarV_TdW_3 $$
      where $W_3$ is a Wiener process.
      Making use of the answer provided here I get for the characteristic function of the stopped Process $log S_tau$:



      $$varphi_S_tau^b, sleft(uright) = Eleft( e^iu S_tau right) \
      = Eleft( Eleft( e^iuS_tau midtau right)right) \
      = Eleft( e^iubarV_tautau/2-tauleft(barV_tauright)u^2/2 right) \
      =lambda int_0^infty e^-lambda + iubarV_tautau/2-tauleft(barV_tauright)u^2/2 , dtau.
      $$
      Here I am stuck as I do not see how to integrate $barV_tau$ over $tau$..is there any way to represent the distribution of the stopped Wiener Process $log S_tau$ as a function of $barV_tau$?







      share|cite|improve this question












      Let $(W_s)_s geq 0$ be a Wiener process and $tau$ be a random variable with an exponential distribution with parameter $lambda$. Suppose that $W$ and $tau$ are independent. In this question, we see that the distribution of the stopped Wiener process $W_tau$ corresponds to a Laplace distribution with scale parameter $fracsigmasqrt2lambda$ where $sigma$ is the instantaneous variance of the Wiener process.



      Suppose now, that the variance $sigma^2$ also follows a stochastic process such that we have:
      $$dS = sigma SdW_s \
      dsigma^2 = alphasigma^2dt + xisigma^2dW_sigma$$
      where $alpha$ and $xi$ are independent of $S$ and $dW_s$ and $dW_sigma$ are independent Wiener processes.



      My aim is to derive the distribution of $log S_tau$.



      First, if $barV_T$ denotes the mean variance over some time interval $[0,T]$ defined by
      $$barV_T = frac1T intlimits_0^Tsigma^2(t)dt,$$
      it is easy to show (Lemma of Îto) that
      $$log S_T = log S_0 - barV_TT/2 + intlimits_0^TsqrtbarV_TdW_3 $$
      where $W_3$ is a Wiener process.
      Making use of the answer provided here I get for the characteristic function of the stopped Process $log S_tau$:



      $$varphi_S_tau^b, sleft(uright) = Eleft( e^iu S_tau right) \
      = Eleft( Eleft( e^iuS_tau midtau right)right) \
      = Eleft( e^iubarV_tautau/2-tauleft(barV_tauright)u^2/2 right) \
      =lambda int_0^infty e^-lambda + iubarV_tautau/2-tauleft(barV_tauright)u^2/2 , dtau.
      $$
      Here I am stuck as I do not see how to integrate $barV_tau$ over $tau$..is there any way to represent the distribution of the stopped Wiener Process $log S_tau$ as a function of $barV_tau$?









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      asked Aug 21 at 14:01









      muffin1974

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