On the First Hitting Time Problems for Diffusion Processes: Local Time-Space Approach

Abstract

Using the local time-space calculus of Peskir (2005) and the method developed in Mijatovic (2010), we derive a new integral representation for the distribution of the first-passage time (FPT) of a diffusion process through a time-dependent barrier. We present a complete three-step numerical algorithm: first, the problem is reduced to a Volterra-type integral equation; second, its kernel is approximated by a Markov chain; finally, the resulting equation is solved using a quadrature method. The method is implemented for several representative examples, and its convergence properties are established. An extension to double barrier problems is carried out.