First-Passage-Time Distribution for Variable-Diffusion Processes

First-passage-time distribution, which presents the likelihood of a stock reaching a pre-specified price at a given time, is useful in establishing the value of financial instruments and in designing trading strategies. First-passage-time distribution for Wiener processes has a single peak, while that for stocks exhibits a notable second peak within a trading day. This feature has only been discussed sporadically-often dismissed as due to insufficient/incorrect data or circumvented by conversion to tick time-and to the best of our knowledge has not been explained in terms of the underlying stochastic process. It was shown previously that intra-day variations in the market can be modeled by a stochastic process containing two variable-diffusion processes (Hua et al. in, Physica A 419:221-233, 2015). We show here that the first-passage-time distribution of this two-stage variable-diffusion model does exhibit a behavior similar to the empirical observation. In addition, we find that an extended model incorporating overnight price fluctuations exhibits intra- and inter-day behavior similar to those of empirical first-passage-time distributions.