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A correction note on the first passage time of an Ornstein-Uhlenbeck process to a boundary

2000; Springer Science+Business Media; Volume: 4; Issue: 1 Linguagem: Inglês

10.1007/s007800050007

1432-1122

B. LeBlanc, Olivier Renault, Olivier Scaillet,

Financial Markets and Investment Strategies

This paper provides the derivation of the hitting time density of an Ornstein-Uhlenbeck process to a flat boundary. The derivation relies on a change of measure approach and delivers an explicit formula. This formula is an amended expression of the result given in Leblanc and Scaillet (1998). It corresponds to the formula given by a time substitution approach when the boundary level coincides with the mean of the invariant measure. It can for example be used to price digital up-and-in credit spread options when the logarithm of the credit spread is assumed to follow an Ornstein-Uhlenbeck process.