First-passage times of two-dimensional Brownian motion. (English) Zbl 1358.60084

Kou, Steven; Zhong, Haowen

Adv. Appl. Probab. 48, No. 4, 1045-1060 (2016).

Summary: First-passage times (FPTs) of two-dimensional Brownian motion have many applications in quantitative finance. However, despite various attempts since the 1960s, there are few analytical solutions available. By solving a nonhomogeneous modified Helmholtz equation in an infinite wedge, we find analytical solutions for the Laplace transforms of FPTs; these Laplace transforms can be inverted numerically. The FPT problems lead to a class of bivariate exponential distributions which are absolute continuous but do not have memoryless property. We also prove that the density of the absolute difference of FPTs tends to \(\infty\) if and only if the correlation between the two Brownian motions is positive.

MSC:

60J65

Brownian motion

Keywords:

two-dimensional Brownian motion; first-passage times; default correlation