Here, I apply the theory outlined in the previous post to fully describe the drawdown point process of a standard Brownian motion. In fact, as I will show, the drawdowns can all be constructed from independent copies of a single ‘Brownian excursion’ stochastic process. Recall that we start with a continuous stochastic process *X*, assumed here to be Brownian motion, and define its running maximum as and drawdown process . This is as in figure 1 above.

Next, was defined to be the drawdown ‘excursion’ over the interval at which the maximum process is equal to the value . Precisely, if we let be the first time at which *X* hits level and be its right limit then,

Next, a random set *S* is defined as the collection of all nonzero drawdown excursions indexed the running maximum,

The set of drawdown excursions corresponding to the sample path from figure 1 are shown in figure 2 below.

As described in the post on semimartingale local times, the joint distribution of the drawdown and running maximum , of a Brownian motion, is identical to the distribution of its absolute value and local time at zero, . Hence, the point process consisting of the drawdown excursions indexed by the running maximum, and the absolute value of the excursions from zero indexed by the local time, both have the same distribution. So, the theory described in this post applies equally to the excursions away from zero of a Brownian motion.

Before going further, let’s recap some of the technical details. The excursions lie in the space *E* of continuous paths , on which we define a canonical process *Z* by sampling the path at each time *t*, . This space is given the topology of uniform convergence over finite time intervals (compact open topology), which makes it into a Polish space, and whose Borel sigma-algebra is equal to the sigma-algebra generated by . As shown in the previous post, the counting measure is a random point process on . In fact, it is a Poisson point process, so its distribution is fully determined by its intensity measure .

Theorem 1IfXis a standard Brownian motion, then the drawdown point processis Poisson with intensity measurewhere,

is the standard Lebesgue measure on.is a sigma-finite measure onEgiven by

(1)

for all bounded continuous continuous mapswhich vanish on paths of length less thanL(some). The limit is taken over,denotes expectation under the measure with respect to whichZis a Brownian motion started at, andis the first time at whichZhits 0. This measure satisfies the following properties,

-almost everywhere, there exists a timesuch thatonandeverywhere else.for each, the distribution ofhas density

(2)

over the range.over,is Markov, with transition function of a Brownian motion stopped at zero.