Friday, 24 August 2012

stochastic calculus - Units in Ornstein-Uhlenbeck(OU) process

Take an OU process characterized by



X(0) = x

dX(t) = - a X(t) dt + b dW(t)


where a,b >0. The parameter a is usually interpreted a dissipative term, and b is a volatility term.



My question is this: What are the units of a and b? Is it true that a is (time) -1 , and b is unitless? Then how can one make sense of the variance which approaches (b 2 /(2 a)) as t goes to infinity?



Thanks for your help.

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