On the Laplace Transforms of the First Hitting Times for Drawdowns and Drawups of Diffusion-Type Processes

Abstract

We obtain closed-form expressions for the value of the joint Laplace transform of therunning maximum and minimum of a diffusion-type process stopped at the first time at which theassociated drawdown or drawup process hits a constant level before an independent exponentialrandom time. It is assumed that the coefficients of the diffusion-type process are regular functionsof the current values of its running maximum and minimum. The proof is based on the solution tothe equivalent inhomogeneous ordinary differential boundary-value problem and the applicationof the normal-reflection conditions for the value function at the edges of the state space of theresulting three-dimensional Markov process. The result is related to the computation of probabilitycharacteristics of the take-profit and stop-loss values of a market trader during a given time period.