SDES with uniform distributions: Peacocks, conic martingales and mean reverting uniform diffusions
(2020) Stochastic Processes and Their Applications — Vol. 130, n° 7, p. 3895-3919 (2020)
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- Peacocks are increasing processes for the convex order. To any peacock, one can associate martingales with the same martinal laws. We are interested in finding the diffusion associated to the uniform peacock, i.e., to the peacock with uniform law at all times on a time-varying support [a(t),b(t)]. Following an idea from Dupire, Madan and Yor propose a construction to find a diffusion martingale associated to a peacock, under the assumption of existence of a solution to a particular stochastic differential equation (SDE). In this paper we derive the SDE associated to the uniform peacock and give sufficient conditions on the (conic) boundary to have a unique strong or weak solution and analyse the local time at the boundary. Eventually, we focus on the constant support case. Given that the only uniform martingale with time-independent support proves to be a constant, we consider more general (mean reverting) diffusions. We prove existence of a solution to the related SDE and derive the moments of transition densities. Limit-laws and ergodic results show that the transition law tends to a uniform distribution.
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Brigo, D., Jeanblanc, M., & Vrins, F. (2020). SDES with uniform distributions: Peacocks, conic martingales and mean reverting uniform diffusions. Stochastic Processes and Their Applications, 130(7), 3895-3919. https://doi.org/10.1016/j.spa.2019.11.003 (Original work published 2020)