Hidden Geometry of Bi-Directional Grid Constrained Stochastic Processes

TL;DR

This paper explores the geometric properties of Bi-Directional Grid Constrained stochastic processes, identifying their convex forms and hidden barriers, with applications in finance and chemistry.

Contribution

It introduces the geometric analysis of BGC stochastic processes, identifying their convex form and deriving hidden barriers through simulation and comparison with Ornstein-Uhlenbeck processes.

Findings

Parabolic cylinder is the optimal convex form for the process.

Hidden reflective barriers are characterized and formula derived.

Applications include interest rate regulation and chemical reaction modeling.

Abstract

Bi-Directional Grid Constrained (BGC) stochastic processes (BGCSP) are constrained It\^{o} diffusions with the property that the further they drift away from the origin, the more resistance to movement in that direction they undergo. We investigate the underlying characteristics of the BGC parameter $\Psi (x, t)$ by examining its geometric properties. The most appropriate convex form for $\Psi$, i.e. the parabolic cylinder is identified after extensive simulation of various possible forms. The formula for the resulting hidden reflective barrier(s) is determined by comparing it with the simpler Ornstein-Uhlenbeck process (OUP). Applications of BGCSP arise when a series of semipermeable barriers are present, such as regulating interest rates and chemical reactions under concentration gradients, which gives rise to two hidden reflective barriers.