© 2005 Kazuhisa Matsuda All rights reserved.

Introduction to Brownian Motion

Kazuhisa Matsuda

Department of Economics
The Graduate Center, The City University of New York,
365 Fifth Avenue, New York, NY 10016-4309
Email: maxmatsuda@maxmatsuda.com
http://www.maxmatsuda.com/

January 2005

Abstract

This paper presents the basic knowledge of a standard Brownian motion which is a
building block of all stochastic processes. A standard Brownian motion is a subclass of 1)
continuous martingales, 2) Markov processes, 3) Gaussian processes, and 4) Itô diffusion
processes. It is also a subclass of Lévy processes although we will not discuss this in this
sequel.

© 2005 Kazuhisa Matsuda All rights reserved.

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© 2005 Kazuhisa Matsuda All rights reserved.

[1] Brownian Motion

[1.1] Standard Brownian Motion

Definition 1.1 Standard Brownian motion (Standard Wiener process) A standard

Brownian motion ( Bt∈[0,∞ ) ) is a real valued stochastic process defined on a filtered
probability space (Ω, Ft∈[0,∞ ) , P ) satisfying:

(1) Its increments are independent. In other words, for 0 ≤ t1 < t2 < ... < tn < ∞ :

P ( Bt0 ∩ Bt1 − Bt0 ∩ Bt2 − Bt1 ∩ ... ∩ Btn − Btn−1 )

= P ( Bt0 ) P ( Bt1 − Bt0 ) P ( Bt2 − Bt1 )...P ( Btn − Btn−1 ) .

(2) Its increments are stationary (time homogeneous): i.e. for h ≥ 0 , Bt + h − Bt has the
same distribution as Bh . In other words, the distribution of increments does not depend
on t .
(3) P ( B0 = 0) = 1 . The process starts from 0 almost surely (with probability 1).
(4) Bt ∼ Normal (0, t ) . Its increments follow a Gaussian distribution with the mean 0 and
the variance t .

Definition 1.2 Standard Brownian motion with starting point c Let c be a real
valued constant or a random variable independent of a standard Brownian motion
( Bt∈[0,∞ ) ) . Then, a standard Brownian motion with starting point c is a real valued
stochastic process defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) :

(c + Bt∈[0,∞ ) ) .

Theorem 1.1 Standard Brownian motion A standard Brownian motion process

( Bt∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) satisfies the following
conditions:

(1) The process is stochastically continuous: ∀ε > 0 , lim P( X t + h − X t ≥ ε ) = 0 .

h →0

(2) Its sample path (trajectory) is continuous in t (i.e. continuous ∈ rcll) almost surely.

Proof

Consult Karlin (1975). We have to remind you that this proof is not that simple.

[1.2] Brownian Motion with Drift

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© 2005 Kazuhisa Matsuda All rights reserved.

Definition 1.3 Brownian motion with drift Let ( Bt∈[0,∞ ) ) be a standard Brownian
motion process defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) . Then, a Brownian
motion with drift is a real valued stochastic process defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) as:

( X t∈[0,∞ ) ) ≡ ( µ t + σ Bt∈[0,∞ ) ) ,

where µ ∈ R is called a drift and σ ∈ R + is called a diffusion (volatility) parameter. A

Brownian motion with drift satisfies the following conditions:

(1) Its increments are independent. In other words, for 0 ≤ t1 < t2 < ... < tn < ∞ :

P ( X t0 ∩ X t1 − X t0 ∩ X t2 − X t1 ∩ ... ∩ X tn − X tn−1 )
= P ( X t0 ) P ( X t1 − X t0 ) P ( X t2 − X t1 )...P ( X tn − X tn−1 ) .

(2) Its increments are stationary (time homogeneous): i.e. for h ≥ 0 , X t + h − X t has the
same distribution as X h . In other words, the distribution of increments does not depend
on t .
(3) X t ≡ µ t + σ Bt ∼ Normal ( µ t , σ 2t ) . Its increments follow a Gaussian distribution with
the mean µt and the variance σ 2t .
(4) Its sample path (trajectory) is continuous in t (i.e. continuous ∈ rcll) almost surely.

[1.3] Sample Paths Properties of Brownian Motion

Before discussing the sample paths properties of Brownian motion, take a look at
simulated sample paths of a standard Brownian motion on Panel (A) in Figure 1.1 and
those of a Brownian motion with drift on Panel (B) and (C).

20

10

-10

-20
0 100 200 300 400 500
Time

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© 2005 Kazuhisa Matsuda All rights reserved.

A) Sample Paths of a Standard Brownian Motion.

50

0 µ=0.2,σ=1

-50 µ=0,σ=1

-100 µ=−0.2,σ=1

0 100 200 300 400 500

Time

B) Sample Paths of a Brownian Motion with Drift. Different drifts and same diffusion
parameters.

250

200
µ=0,σ=1
150

100 µ=0,σ=5

50
µ=0,σ=10
0

0 100 200 300 400 500

Time

C) Sample Paths of a Brownian Motion with Drift. Zero drifts and different diffusion
parameters.

Figure 1.1 Simulated Sample Paths of Brownian Motion

Theorem 1.2 Sample paths properties of Brownian motion with drift Consider a
real valued Brownian motion with drift ( X t∈[0,T ] ) ≡ ( µ t + σ Bt∈[0,∞ ) ) defined on a filtered
probability space (Ω, Ft∈[0,∞ ) , P ) . Then, the sample paths of ( X t∈[0,T ] ) possess following
properties:

(1) Sample paths are continuous with probability 1.

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© 2005 Kazuhisa Matsuda All rights reserved.

(2) Sample paths are of infinite variation on any finite interval [0, t ] . In other words, the
total variation on any finite interval [0, t ] of a sample path of a Brownian motion with
drift is infinite with probability 1 in the limit n → ∞ (as the partition becomes finer and
finer):

⎛ n
⎞
P ⎜ lim T ( X ) = lim sup ∑ X (ti ) − X (ti −1 ) = ∞ ⎟ = 1 .
⎝ n→∞ n →∞
i =1 ⎠

Intuitively speaking, the infinite variation property means highly oscillatory sample
paths.
(3) The quadratic variations of sample paths of Brownian motions with drift ( X t∈[0,T ] ) are
finite on any finite interval [0, t ] and converge to σ 2t with probability 1 in the limit
n → ∞ (as the partition becomes finer and finer):

⎛ n
⎞
P ⎜ lim T 2 ( X ) = lim sup ∑ X (ti ) − X (ti −1 ) = σ 2t < ∞ ⎟ = 1 .
2

⎝ n→∞ n →∞
i =1 ⎠

For more details and proofs about theorem 1.2, consult Sato (1999) page 22 – 28 and
Karatzas and Shreve (1991) section 1.5 and 2.9. We also recommend Rogers and
Williams (2000) chapter 1.

[1.4] Equivalent Transformations of Brownian Motion

Theorem 1.3 Equivalent transformations of Brownian motion If ( Bt∈[0,∞ ) ) is a real

valued standard Brownian motion defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) ,
then, it satisfies the four conditions:

(1) A standard Brownian motion ( Bt∈[0,∞ ) ) is symmetric. In other words, the process
( − Bt∈[0,∞ ) ) is also a standard Brownian motion:

( Bt∈[0,∞ ) ) d (− Bt∈[0,∞ ) ) .

(2) A standard Brownian motion ( Bt∈[0,∞ ) ) has a time shifting property. In other words,
the process ( Bt + A − BA ) is also a standard Brownian motion for ∀A ∈ R + :

( Bt + A − BA ) d ( Bt∈[0,∞ ) ) .

(3) Time scaling property of a standard Brownian motion. For any nonzero c ∈ R , the
1
process ( cBt / c ) or ( Bct ) is also a standard Brownian motion:
c

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© 2005 Kazuhisa Matsuda All rights reserved.

1
( Bct ) d ( cBt / c ) d ( Bt∈[0,∞ ) ) .
c

(4) Time inversion property of a standard Brownian motion (i.e. a variant of (3)). The
process defined as:

⎧0 if t = 0
( Bt∈[0,∞ ) ) = ⎨ ,
⎩(tB1/ t ) if 0 < t < ∞

is also a standard Brownian motion:

( Bt∈[0,∞ ) ) d ( Bt∈[0,∞ ) ) .

Proof

These are easy exercises for readers. For the proof of the continuity of ( Bt∈[0,∞ ) ) at 0,
consult Rogers and Williams (2000) page 4.

[1.5] Characteristic Function of Brownian Motion

Consider a real valued Brownian motion with drift process ( X t∈[0,∞ ) ) ≡ ( µ t + σ Bt∈[0,∞ ) )
defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) . Its characteristic function can be
obtained by the direct use of the definition of a characteristic function (i.e. Fourier
transform of the probability density function with Fourier transform parameters (1,1) ):

∞
φ X (ω ) ≡ F [ P( x)] ≡ ∫ eiω x P( x)dx
t −∞

∞ 1 ⎧⎪ ( x − µ t )2 ⎫⎪
φ X t (ω ) = ∫ e iω x
exp ⎨− ⎬ dx
−∞
2πσ 2t ⎪⎩ 2σ 2t ⎪
⎭
σ tω
2 2
φ X t (ω ) = exp(i µ tω − ).
2

[2] Brownian Motion as a Subclass of Continuous Martingale

Definition 2.1 Continuous martingale A continuous stochastic process ( X t∈[0,∞ ) )

defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) is said to be a continuous martingale
with respect to the filtration Ft and under the probability measure P if it satisfies the
following conditions:

(1) X t is nonanticipating.

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© 2005 Kazuhisa Matsuda All rights reserved.

(2) E[ X t ] < ∞ for ∀t ∈ [0, T ] . Finite mean condition.

(3) E[ X u Ft ] = X t for ∀u > t .

In other words, if a stochastic process is a martingale, then, the best prediction of its
future value is its present value. Note that the definition of martingale makes sense only
when the underlying probability measure P and the filtration Ft have been specified.

The fundamental property of a martingale process is that its future variations are
completely unpredictable with the filtration Ft :

∀u > 0, E[ xt +u − xt Ft ] = E[ xt +u Ft ] − E[ xt Ft ] = xt − xt = 0 .

Finite mean condition (2) is necessary to ensure the existence of the conditional
expectation.

[2.1] A Continuous Martingale Property of Standard Brownian Motion

Theorem 2.1 Standard Brownian motion is a continuous martingale Let ( Bt∈[0,∞ ) )

be a standard Brownian motion process defined on a filtered probability space
(Ω, Ft∈[0,∞ ) , P ) . Then, ( Bt∈[0,∞ ) ) is a continuous martingale with respect to the filtration
Ft∈[0,∞ ) and the probability measure P .

Proof

By definition, ( Bt∈[0,∞ ) ) is a nonanticipating process (i.e. Ft∈[0,∞ ) - adapted process) with

the finite mean E[ Bt ] = 0 < ∞ for ∀t ∈ [0, ∞ ) . For ∀0 ≤ t ≤ u < ∞ :

u
Bu = Bt + ∫ dBv . (1)
t

Using the equation (1) and the fact that a Brownian motion is a nonanticipating process,
i.e. E[ Bt Ft ] = Bt :

u
E[ Bu − Bt Ft ] = E[ Bu Ft ] − E[ Bt Ft ] = E[ Bt + ∫ dBv Ft ] − Bt
t
u
E[ Bu − Bt Ft ] = E[ Bt Ft ] + E[ ∫ dBv Ft ] − Bt
t

E[ Bu − Bt Ft ] = Bt + 0 − Bt = 0 ,

or in other words:

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© 2005 Kazuhisa Matsuda All rights reserved.

u u
E[ Bu Ft ] = E[ Bt + ∫ dBv Ft ] = E[ Bt Ft ] + E[ ∫ dBv Ft ] = Bt + 0
t t

E[ Bu Ft ] = Bt ,

which is a martingale condition.

Theorem 2.2 Squared standard Brownian motion Bt 2 is not a continuous martingale

Let ( Bt∈[0,∞ ) ) be a standard Brownian motion defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) . Then, Bt 2 is not a continuous martingale with respect to the
filtration Ft∈[0,∞ ) and the probability measure P .

Proof

Using the equation (1) and independent increments condition, for 0 ≤ t ≤ u < ∞ :

u
E[ Bu 2 Ft ] = E[( Bt + ∫ dBv )2 Ft ]
t
u u
E[ Bu Ft ] = E[ Bt + 2 Bt ∫ dBv + ∫ dBv 2 Ft ]
2 2
t t
u u
E[ Bu 2 Ft ] = E[ Bt 2 Ft ] + E[2 Bt ∫ dBv Ft ] + E[ ∫ dBv 2 Ft ]
t t
u
E[ Bu Ft ] = E[ Bt Ft ] + E[ ∫ dBv Ft ]
2 2 2
t

E[ Bu Ft ] = Bt + (u − t ) ,
2 2

which violates a martingale condition.

Theorem 2.3 Squared standard Brownian motion minus time Bt 2 − t is a continuous

martingale Let ( Bt∈[0,∞ ) ) be a standard Brownian motion defined on a filtered
probability space (Ω, Ft∈[0,∞ ) , P ) . Then, Bt 2 − t is a continuous martingale with respect to
the filtration Ft∈[0,∞ ) and the probability measure P .

Proof

Using the equation (1) and independent increments condition, for 0 ≤ t ≤ u < ∞ :

u
E[ Bu 2 − u Ft ] = E[( Bt 2 − t ) + {( ∫ dBv ) 2 − (u − t )} Ft ]
t

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© 2005 Kazuhisa Matsuda All rights reserved.

u
E[ Bu 2 − u Ft ] = E[( Bt 2 − t ) Ft ] + E[( ∫ dBv )2 − (u − t ) Ft ]
t
u
E[ Bu 2 − u Ft ] = Bt 2 − t + E[( ∫ dBv )2 Ft ] − (u − t )
t

E[ Bu − u Ft ] = Bt − t + (u − t ) − (u − t ) = Bt 2 − t ,
2 2

which satisfies a martingale condition.

Theorem 2.4 Converse of theorem 2.3 Let ( X t∈[0,∞ ) ) be a continuous martingale

defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) . Then, the process ( X t∈[0,∞ ) ) is a
standard Brownian motion if and only if it satisfies:

(1) X 0 = 0 . The process starts from zero.

(2) X t 2 − t is a martingale with respect to the filtration Ft∈[0,∞ ) and the probability
measure P .

[2.2] Nonmartingale Property of a Brownian Motion with Drift

Theorem 2.5 Brownian motion with drift is not a continuous martingale Let
( Bt∈[0,∞ ) ) be a standard Brownian motion process defined on a filtered probability space
(Ω, Ft∈[0,∞ ) , P ) . Then, a Brownian motion with drift ( X t∈[0,∞ ) ) ≡ ( µ t + σ Bt∈[0,∞ ) ) is not a
continuous martingale with respect to the filtration Ft∈[0,∞ ) and the probability measure P .

Proof

By definition, ( X t∈[0,∞ ) ) is a nonanticipating process (i.e. Ft∈[0,∞ ) - adapted process) with

the finite mean E[ X t ] = E[ µ t + σ Bt ] = µ t < ∞ for ∀t ∈ [0, ∞ ) and µ ∈ R . For
∀0 ≤ t ≤ u < ∞ :

u
X u = X t + ∫ dX v . (2)
t

Using the equation (2) and the fact that a Brownian motion with drift is a nonanticipating
process, i.e. E[ X t Ft ] = X t :

u u
E[ X u Ft ] = E[ X t + ∫ dX v Ft ] = E[ X t Ft ] + E[ ∫ dX v Ft ]
t t

E[ X u Ft ] = X t + µ (u − t ) ,

which violates a martingale condition.

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© 2005 Kazuhisa Matsuda All rights reserved.

Theorem 2.6 Detrended Brownian motion with drift is a continuous martingale

Let ( Bt∈[0,∞ ) ) be a standard Brownian motion process defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) . Then, a detrended Brownian motion with drift defined as:

( X t∈[0,∞ ) − µ t ) ≡ ( µ t + σ Bt∈[0,∞ ) − µ t ) ≡ (σ Bt∈[0,∞ ) ) ,

is a continuous martingale with respect to the filtration Ft∈[0,∞ ) and the probability
measure P .

Proof

For ∀0 ≤ t ≤ u < ∞ :

u u
E[ X u − µu Ft ] = E[( X t − µt ) + ( ∫ dX v − µ ∫ dv) Ft ]
t t
u u
E[ X u − µu Ft ] = E[( X t − µt ) Ft ] + E[( ∫ dX v − µ ∫ dv) Ft ]
t t

E[ X u − µu Ft ] = X t − µt + µ (u − t ) − µ (u − t )
E[ X u − µu Ft ] = X t − µt ,

which satisfies a martingale condition.

[2.3] A Continuous Martingale Property of Exponential Standard Brownian Motion

Theorem 2.7 Exponential of a standard Brownian motion is a continuous martingale

Let ( Bt∈[0,∞ ) ) be a standard Brownian motion process defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) . Then, for any θ ∈ R , the exponential of a standard Brownian motion
defined as:

1
Z t = exp(θ Bt − θ 2t ) , (3)
2

is a continuous martingale with respect to the filtration Ft∈[0,∞ ) and the probability
measure P .

Proof

We first prove the often used proposition.

Proposition 2.1 Note that if X ∼ Normal ( µt , σ 2t ) , then for any θ ∈ R :

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© 2005 Kazuhisa Matsuda All rights reserved.

1
E[exp(θ X )] = exp(θµ t + θ 2σ 2t ) . (4)
2

Proof

∞ 1 ( X − µt )2
E[exp(θ X )] = ∫ exp(θ X ) exp{− }dX
−∞
2πσ 2t 2σ 2t
∞ 1 −θ X 2σ 2t + X 2 − 2 X µ t + µ 2t 2
=∫ exp{− }dX
−∞
2πσ 2t 2σ 2t
∞ 1 X 2 − 2(θσ 2t + µ t ) X + µ 2t 2
=∫ exp{− }dX
−∞
2πσ 2t 2σ 2t
∞ 1 ( X − (θσ 2t + µ t )) 2 − (θσ 2t + µ t ) 2 + µ 2t 2
=∫ exp{− }dX
−∞
2πσ 2t 2σ 2t
∞ 1 ( X − (θσ 2t + µ t )) 2 (θσ 2t + µ t ) 2 − µ 2t 2
=∫ exp{− }exp{ }dX
−∞
2πσ 2t 2σ 2t 2σ 2t
(θσ 2t + µ t ) 2 − µ 2t 2 ∞ 1 ( X − (θσ 2t + µ t )) 2
= exp{ }∫ exp{− }dX
2σ 2t −∞
2πσ 2t 2σ 2t
(θσ 2t + µt ) 2 − µ 2t 2 θ 2σ 4t 2 + 2θσ 2t µ t
= exp{ } = exp{ }
2σ 2t 2σ 2t
1
= exp{θµ t + θ 2σ 2t}
2

Now we are ready to prove the Brownian exponential defined by the equation (3) is a
martingale.

Firstly, the process ( Z t∈[0,∞ ) ) is nonanticipating because a standard Brownian motion

( Bt∈[0,∞ ) ) is nonanticipating.

Secondly, it satisfies the finite mean condition, since E[ Z t ] = 1 < ∞ :

1
E[ Z t ] = E[exp(θ Bt − θ 2t )]
2
1
E[ Z t ] = E[exp(θ Bt ) exp(− θ 2t )]
2
1
E[ Z t ] = exp( − θ 2t ) E[exp(θ Bt )] ,
2

1
using the proposition 2.1, E[exp(θ Bt )] = exp( θ 2t ) :
2

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© 2005 Kazuhisa Matsuda All rights reserved.

1 1
E[ Z t ] = exp(− θ 2t ) exp( θ 2t ) = 1 .
2 2

For ∀0 ≤ t ≤ t + h < ∞ , by the definition of Z t :

1
E[ Z t + h Ft ] = E[exp{θ Bt + h − θ 2 (t + h)} Ft ] .
2

The trick is to multiply exp(θ Bt − θ Bt ) = e0 = 1 inside the expectation operator:

1
E[ Z t + h Ft ] = E[exp(θ Bt − θ Bt ) exp{θ Bt + h − θ 2 (t + h)} Ft ]
2
1 1
E[ Z t + h Ft ] = E[exp(θ Bt ) exp(−θ Bt ) exp(θ Bt + h ) exp(− θ 2t ) exp(− θ 2 h) Ft ]
2 2
1 1
E[ Z t + h Ft ] = E[exp(θ Bt − θ 2t ) exp{θ ( Bt + h − Bt ) − θ 2 h} Ft ] .
2 2

Since Brownian increments are independent:

1 1
E[ Z t + h Ft ] = E[exp(θ Bt − θ 2t ) Ft ]E[exp{θ ( Bt + h − Bt ) − θ 2 h} Ft ] ,
2 2

and since Bt is Ft -adapted:

1 1
E[ Z t + h Ft ] = exp(θ Bt − θ 2t ) E[exp{θ ( Bt + h − Bt ) − θ 2 h}] .
2 2

By the definition of Z t :

1
E[ Z t + h Ft ] = Z t E[exp{θ ( Bt + h − Bt )}exp(− θ 2 h)] ,
2

1
and since exp(− θ 2 h) is a constant:
2

1
E[ Z t + h Ft ] = Z t exp(− θ 2 h) E[exp{θ ( Bt + h − Bt )}] .
2

Use the proposition 2.1 because Bt + h − Bt ∼ Normal (0, h) :

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© 2005 Kazuhisa Matsuda All rights reserved.

1 1
E[ Z t + h Ft ] = Z t exp(− θ 2 h) exp( θ 2 h)
2 2
E[ Z t + h Ft ] = Z t .

Figure 2.1 Brownian motion as a subclass of continuous martingales

[3] Brownian Motion as a Subclass of Gaussian Processes

Definition 3.1 Gaussian process A stochastic process ( X t∈[0,∞ ) ) on R d (i.e. this

means that X t is a d -dimensional vector) defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) is said to be a Gaussian process, if, for any increasing sequence of
time 0 ≤ t1 < t2 < ... < tk < ∞ , the law of any finite dimensional vector
( X (t1 ), X (t2 ),..., X (tk ) ) of the process is multivariate normal.
Because all finite dimensional multivariate normal distributions are uniquely determined
by their means and covariance function, Gaussian processes can be defined in an alternate
way.

Definition 3.2 Gaussian process A stochastic process ( X t∈[0,∞ ) ) on R d (i.e. this

means that X t is a d -dimensional vector) defined on a filtered probability
space (Ω, Ft∈[0,∞ ) , P ) is said to be a Gaussian process, if the law of the process ( X t∈[0,∞ ) ) is
uniquely determined by:

(1) Means E[ X t ] .

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(2) Covariance functions Cov ( X t , X u ) = E[{ X t − E ( X t )}{ X u − E ( X u )}T ] for

∀0 ≤ t ≠ u < ∞ ,

where T is a transposition operator.

Theorem 3.1 A standard Brownian motion A standard Brownian motion ( Bt∈[0,∞ ) ) is

a one dimensional Gaussian process with:

(1) Zero mean E[ Bt ] = 0 .

(2) Covariance function Cov ( Bt , Bu ) = t ∧ u = min{t , u} .

Proof

By the definition of a standard Brownian motion. For more details, we recommend Karlin
and Taylor (1975) page 376-377.

The converse of the theorem 3.1 is also true.

Theorem 3.2 A standard Brownian motion A real valued one dimensional Gaussian
stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) is a
standard Brownian motion with drift, if its mean and covariance function satisfy:

(1) E[ X t ] = 0 .
(2) Cov( X t , X u ) = t ∧ u = min{t , u}

Proof

By the definition of a standard Brownian motion.

Figure 3.1 Brownian motion as a subclass of Gaussian processes

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© 2005 Kazuhisa Matsuda All rights reserved.

[4] Brownian Motion as a Subclass of Markov Processes

We first introduce the definitions and terminologies used in the study of Markov
processes.

Definition 4.1 Transition function Consider a continuous time nonanticipating

stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) which
takes values in a measurable space ( B, B ) (i.e. B ∈ B (R ) ). ( B, B ) is called a state space
of the process and the process is said to be B - valued. Consider an increasing sequence
of time 0 ≤ t ≤ u ≤ v < ∞ . A real valued transition function Pt ,v ( x, B ) with x ∈ R and
B ∈ B (R ) is a mapping which satisfies the following conditions:

(1) Pt ,v ( x, B ) is a probability measure which maps every fixed x into B.

(2) Pt ,v ( x, B ) is B - measurable for every B ∈ B (R ) .
(3) Pt ,t ( x, B ) = δ ( B ) .
(4) Pt ,v ( x, B) = ∫ Pt ,u ( x, dy )Pu ,v ( y, B) .
R

The condition (4) is called the Chapman-Kolmogorov identity. Chapman-Kolmogorov

identity means that the transition probability Pt ,v ( x, B ) of moving from a state x at time
t to a state B at time v can be calculated as a sum (i.e. integral) of the product of the
transition probabilities via an intermediate time t ≤ u ≤ v , i.e. Pt ,u ( x, dy ) and Pu ,v ( y , B ) . In
the general cases, transition functions are dependent on the states and time.

Definition 4.2 Time homogeneous (temporary homogeneous or stationary) transition

function Consider an increasing sequence of time 0 ≤ t ≤ u ≤ v < ∞ . A real valued
transition function Pt ,v ( x, B ) with x ∈ R and B ∈ B (R ) is said to be time homogeneous if
it satisfies:

Pt ,v ( x, B ) = P0,v −t ( x, B ) = Pv −t ( x, B ) ,

which indicates that the transition function Pt ,v ( x, B ) of moving from a state x at time t
to a state B at time v is equivalent to the transition function P0,v −t ( x, B ) of moving from
a state x at time 0 to a state B at time v − t . In other words, the transition function is
independent of the time t and depends only on the interval of time v − t .

Definition 4.3 Chapman-Kolmogorov identity for the time homogeneous transition

function Consider an increasing sequence of time 0 ≤ t ≤ u < ∞ . Chapman-
Kolmogorov identity for the time homogeneous transition function is:

∫
R
P0,t ( x, dy )P0,u ( y, B) = ∫ Pt ( x, dy )Pu ( y, B) = Pt +u ( x, B) .
R

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© 2005 Kazuhisa Matsuda All rights reserved.

Definition 4.4 Markov Processes (less formal) Consider a continuous time

nonanticipating stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space
(Ω, Ft∈[0,∞ ) , P ) . Then, the process ( X t∈[0,∞ ) ) is said to be a Markov process if it satisfies,
for every increasing sequence of time 0 < t1 ≤ t2 ≤ ... ≤ tn ≤ t ≤ u < ∞ :

P ( X u Ft ) = P ( X u X 0 , X t1 , X t2 ,..., X tn , X t ) = P ( X u X t ) ,

Informally, Markov property means that the probability of a random variable X u at time
u ≥ t (tomorrow) conditional on the entire history of the stochastic process F[0,t ] ≡ X [0,t ]
is equal to the probability of a random variable X u at time u ≥ t (tomorrow) conditional
only on the value of a random variable at time t (today). In other words, the history
(sample path) of the stochastic process F[0,t ] is of no importance in that the way this
stochastic process evolved or the dynamics does not mean a thing in terms of the
conditional probability of the process. This property is sometimes called a memoryless
property.

Definition 4.5 Markov Processes (formal) Consider a continuous time

nonanticipating stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space
(Ω, Ft∈[0,∞ ) , P ) which takes values in a measurable space ( B, B ) . ( B, B ) is called a state
space of the process and the process is said to be B - valued. Then, the process ( X t∈[0,∞ ) )
is said to be a Markov process if it satisfies, for an increasing sequence of time
0≤t ≤u≤v<∞ 0<t ≤u<∞:

E[ X v Ft ] = E[ X v X t ] ,

with the transition function:

Pt ,v ( x, B) = ∫ Pt ,u ( x, dy )Pu ,v ( y, B) .
R

Now we are ready to characterize a standard Brownian motion as a subclass of Markov

processes.

Theorem 4.1 A standard Brownian motion process A standard Brownian motion

( Bt∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) satisfies the followings:

(1) It is a time homogeneous Markov process. In other words, for any bounded Borel
function f : R → R and for ∀0 ≤ t ≤ u < ∞ :

E[ f ( Bu ) Ft ] = P0,u −t f ( Bt ) = Pu −t f ( Bt ) .

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© 2005 Kazuhisa Matsuda All rights reserved.

(2) Its transition function Pu −t ≡ Ph is given by:

1 ⎧ ( x − y)2 ⎫
Ph ( x, y ) = exp ⎨− ⎬.
2π t ⎩ 2t ⎭

⎧⎪ f ( x) if t = 0
(3) Ph f ( x) = ⎨ ∞ .
⎪⎩ ∫−∞ h
P ( x , y ) f ( y ) dy if t > 0

Proof

Markov property is a result of independent increments property of Brownian motion. Let

( Bt∈[0,∞ ) ) be a standard Brownian motion defined on a filtered probability space
(Ω, Ft∈[0,∞ ) , P ) . Consider an increasing sequence of time 0 < t1 < t2 < ... < tn < t < u < ∞
where t is the present. As a result of independent increments condition:

P ( X u − X t X t1 − X 0 , X t2 − X t1 ,..., X t − X tn )
P( X u − X t ∩ X t1 − X 0 , X t2 − X t1 ,..., X t − X tn )
=
P( X t1 − X 0 , X t2 − X t1 ,..., X t − X tn )
P( X u − X t )P( X t1 − X 0 , X t2 − X t1 ,..., X t − X tn )
=
P( X t1 − X 0 , X t2 − X t1 ,..., X t − X tn )
= P( X u − X t ) ,

which means that there is no correlation (probabilistic dependence structure) on the

increments among the past, the present, and the future.

Using the simple relationship X u ≡ ( X u − X t ) + X t for an increasing sequence of time

0 < t1 < t2 < ... < tn < t < u < ∞ :

P ( X u X 0 , X t1 , X t2 ,..., X tn , X t ) = P (( X u − X t ) + X t X 0 , X t1 , X t2 ,..., X tn , X t )
= P( X u X t ) ,

which holds because an increment ( X u − X t ) is independent of X t by definition and the

value of X t depends on its realization X t (ω ) .

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© 2005 Kazuhisa Matsuda All rights reserved.

Figure 4.1 Brownian motion as a subclass of Markov processes

[5] Brownian Motion as a Subclass of Itô Diffusion Processes

Definition 5.1 Itô diffusion processes An Itô diffusion process is a real valued
stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) whose
dynamics (or motion) is governed by a stochastic differential equation of the form:

dX t = b(t , X t )dt + σ (t , X t )dBt ,

where b(t , X t ) ∈ R is called a drift and σ (t , X t ) which is a nonnegative real valued

constant is called a diffusion parameter. In the general case, b(t , X t ) and σ (t , X t ) are
functions of both time and space. As usual, Bt stands for a standard Brownian motion.
The solution of the above stochastic differential equation is given by:

X t = X 0 + ∫ b( s, X s )ds + ∫ σ ( s, X s )dBs .
t t

0 0

Definition 5.2 Time homogeneous (temporary homogeneous or stationary) Itô

diffusion processes A time homogeneous Itô diffusion process is a real valued
stochastic process ( X t∈[0,∞ ) ) defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) whose
dynamics (or motion) is governed by a stochastic differential equation of the form:

dX t = b( X t )dt + σ ( X t )dBt ,

where a drift b( X t ) ∈ R and a diffusion parameter σ ( X t ) ≥ 0 are independent of the time

t and depend only on the space.

Theorem 5.1 Time homogeneous Itô diffusion processes are a subclass of time
homogeneous Markov processes A time homogeneous Itô diffusion process ( X t∈[0,∞ ) )

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© 2005 Kazuhisa Matsuda All rights reserved.

defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) is a time homogeneous Markov

process. In other words, for any bounded Borel function f : R → R and for
∀0 ≤ t ≤ u < ∞ :

E[ f ( Bu ) Ft ] = P0,u −t f ( Bt ) = Pu −t f ( Bt ) ,

where Pu −t ≡ Ph is a time homogeneous transition function given by:

⎧⎪ f ( x) if t = 0
Ph f ( x) = ⎨ ∞ .
⎪⎩ ∫−∞ Ph ( x , y ) f ( y ) dy if t > 0

Proof

Consult Oksendal (2003) pages 115-116.

Theorem 5.2 A standard Brownian motion A standard Brownian motion ( Bt∈[0,∞ ) )

defined on a filtered probability space (Ω, Ft∈[0,∞ ) , P ) is a time homogeneous Itô diffusion
process ( X t∈[0,∞ ) ) (a time homogeneous Markov process) whose dynamics (or motion) is
governed by a stochastic differential equation of the form:

dX t = dBt .

In other words, a standard Brownian motion ( Bt∈[0,∞ ) ) is a time homogeneous Itô

diffusion process with the zero drift b(t , X t ) = 0 and the unit diffusion parameter
σ (t , X t ) = 1 .

Proof

By the definition of a standard Brownian motion.

For more details about Itô diffusion processes, consult an excellent book Oksendal (2003)
chapter 3 and 7.

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© 2005 Kazuhisa Matsuda All rights reserved.

Figure 5.1 Brownian motion as a subclass of Markov processes

References

Karlin, S., and Taylor, H., 1975, A First Course in Stochastic Processes, Academic Press.

Karatzas, Ioannis., and Shreve, S. E., 1991, Brownian Motion and Stochastic Calculus,
Springer-Verlag.

Oksendal, B., 2003, Stochastic Differential Equations: An Introduction with

Applications, Springer.

Rogers, L.C.G., and Williams, D., 2000, Diffusions, Markov Processes and Martingales,
Cambridge University Press.

Sato, K., 1999, Lévy process and Infinitely Divisible Distributions, Cambridge
University Press.

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