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How do you calculate the variance of a transformation of Standard Brownian Motion.

0 votes
asked Mar 23, 2016 in BUS 4028F - Financial Economics by niall_morley (570 points)

How do we go about calculating the variance of $$B_{t}^{2}$$ where $$B_{t}$$ is standard Brownian Motion.

Using $$ B_{t}^{2} - {2t} =2\int_0^t B_{s} dB_s$$

1 Answer

+3 votes
answered Mar 25, 2016 by Chris_Baker (430 points)


$$=E[(B_t^2-E[B_t^2])^2] $$ This you can evaluate.

From here you can use Ito Isometry - Chapter 7 in Fin Eco workbook (Stochastic Calculus). 

In particular: $$E[(\int_0^tB_s dBs)^2] = \int_0^tE[B_s^2]ds $$

An alternative approach to this problem is to transform:

$$B_t = \sqrt{t} \cdot Z $$ where $$Z \sim N(0,1)$$ and then consider moments of the standard normal random variable.