Joint densities of first hitting times of a diffusion process through two time dependent boundaries

Abstract

Consider a one dimensional diffusion process on the diffusion interval $I$ originated in $x_0\in I$. Let $a(t)$ and $b(t)$ be two continuous functions of $t$, $t>t_0$ with bounded derivatives and with $a(t)<b(t)$ and $a(t),b(t)\in I$, $\forall t>t_0$. We study the joint distribution of the two random variables $T_a$ and $T_b$, first hitting times of the diffusion process through the two boundaries $a(t)$ and $b(t)$, respectively. We express the joint distribution of $T_a,T_b$ in terms of $P(T_a<t,T_a<T_b)$ and $P(T_b<t,T_a>T_b)$ and we determine a system of integral equations verified by these last probabilities. We propose a numerical algorithm to solve this system and we prove its convergence properties. Examples and modeling motivation for this study are also discussed.