Question

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.

Answer 1

Say $X$ is a displacement and is measured in meters. Then $a$ indeed has units $1/s$ and $b$ has units $m/\sqrt{s}$; $dt$ as usual has units $s$ and $dW$ has units $1/\sqrt{s}$.

This can be verified by looking at a physical model of the OU process, such as Hooke's law with damping and a noise term (see Wikipedia). Then $a = - k/\gamma$, $b^2 = 2 k_b T/\gamma$, where $k$ is Hooke's constant in kg/s^2, $\gamma$ the friction coefficient in kg/s, and $k_b T$ is in Joules (kg*m^2/s^2).

Answer 2

In your setup the Wiener term carries units. Think of the fact that $W_t - W_s \sim \mathcal{N}(0,t-s)$ for $s < t$.