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Kamal saeed
ID 571-9580
Introduction
Stochastic process: Any variable that
changes over time in uncertain way
Stochastic Process
Discrete
Variable
Continuous
Variable
The value of the variable
can change only at certain
fixed points in time.
The underlying variable
can take any value within
a certain range
13.1 Markov Property
Particular Stochastic process where
on the current value of a variable is
relevant for predicting future.
Past history is irrelevant to use to
predict future price of stock.
Probability distribution for predicting
future price movement.
Weak form of market Efficiency.
13.2 CONTINUOUS-TIME
STOCHASTIC PROCESSES
Value that follows Markov Stochastic
process
its current value is 10 and that the change
in its value during a year is , where
denotes a probability distribution that is
normally distributed with mean m and
variance
Two independent variable , mean is the sum
of the means and the variance is the sum of
variance. Uncertainty is consider as square
root of time.
Wiener Processes
The process followed by the variable is known as a Wiener
process. particular type of Markov stochastic process with a
mean change of zero and a variance rate of 1.0 per year.
Generalized Wiener Process