First-passage times of two-dimensional Brownian motion

Abstract

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 ∞ if and only if the correlation between the two Brownian motions is positive.