Computing the First Passage Time Density of a Time-Dependent Urnstein-Uhlenbeck Process to a Moving Boundary
Applied Mathematics Letters, Vol. 19, pp. 1399-1405, 2006
7 Pages Posted: 27 Aug 2007
In this paper we use the method of images to derive the closed-form formula for the first passage time density of a timed-dependent Ornstein-Uhlenbeck process to a parametric class of moving boundaries. The results are then applied to develop a simple, efficient and systematic approximation scheme to compute tight upper and lower bounds of the first passage time density through a fixed boundary.
Keywords: Ornstein-Uhlenbeck process, Fokker-Planck equation, First passage time density, Method of images, Moving boundary
JEL Classification: C60, G13
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