Embedding laws in diffusions by functions of time

A. M. G. Cox, G. Peskir

Published 2012-01-25, updated 2015-10-28Version 4

We present a constructive probabilistic proof of the fact that if $B=(B_t)_{t\ge0}$ is standard Brownian motion started at $0$, and $\mu$ is a given probability measure on $\mathbb{R}$ such that $\mu(\{0\})=0$, then there exists a unique left-continuous increasing function $b:(0,\infty)\rightarrow\mathbb{R}\cup\{+\infty\}$ and a unique left-continuous decreasing function $c:(0,\infty)\rightarrow\mathbb{R}\cup\{-\infty\}$ such that $B$ stopped at $\tau_{b,c}=\inf\{t>0\vert B_t\ge b(t)$ or $B_t\le c(t)\}$ has the law $\mu$. The method of proof relies upon weak convergence arguments arising from Helly's selection theorem and makes use of the L\'{e}vy metric which appears to be novel in the context of embedding theorems. We show that $\tau_{b,c}$ is minimal in the sense of Monroe so that the stopped process $B^{\tau_{b,c}}=(B_{t\wedge\tau_{b,c}})_{t\ge0}$ satisfies natural uniform integrability conditions expressed in terms of $\mu$. We also show that $\tau_{b,c}$ has the smallest truncated expectation among all stopping times that embed $\mu$ into $B$. The main results extend from standard Brownian motion to all recurrent diffusion processes on the real line.