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    Stochastic Processes 2

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    Seham Raheel
    The document defines and discusses several concepts related to random processes: 1) A random process is a collection of random variables indexed by time or another parameter and can be viewed as a function mapping the index set to a probability space. 2) A filtration is a collection of sigma-algebras representing the increasing information over time. A process is adapted to a filtration if its values are measurable with respect to the sigma-algebras. 3) A Markov process has the property that its future evolution depends only on its present state, not on past states. The transition probability gives the probability that a Markov process moves between states over time.

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    Download as PDF, TXT or read online from Scribd

    Stochastic Processes 2

    Uploaded by

    Seham Raheel
    142 views11 pages
    The document defines and discusses several concepts related to random processes: 1) A random process is a collection of random variables indexed by time or another parameter and can be viewed as a function mapping the index set to a probability space. 2) A filtration is a collection of sigma-algebras representing the increasing information over time. A process is adapted to a filtration if its values are measurable with respect to the sigma-algebras. 3) A Markov process has the property that its future evolution depends only on its present state, not on past states. The transition probability gives the probability that a Markov process moves between states over time.

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    The document defines and discusses several concepts related to random processes: 1) A random process is a collection of random variables indexed by time or another parameter and can be viewed as a function mapping the index set to a probability space. 2) A filtration is a collection of sigma-algebras representing the increasing information over time. A process is adapted to a filtration if its values are measurable with respect to the sigma-algebras. 3) A Markov process has the property that its future evolution depends only on its present state, not on past states. The transition probability gives the probability that a Markov process moves between states over time.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    142 views11 pages

    Stochastic Processes 2

    Uploaded by

    Seham Raheel
    The document defines and discusses several concepts related to random processes: 1) A random process is a collection of random variables indexed by time or another parameter and can be viewed as a function mapping the index set to a probability space. 2) A filtration is a collection of sigma-algebras representing the increasing information over time. A process is adapted to a filtration if its values are measurable with respect to the sigma-algebras. 3) A Markov process has the property that its future evolution depends only on its present state, not on past states. The transition probability gives the probability that a Markov process moves between states over time.

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    of 11

    Random Processes

    Florian Herzog 2013

    Random Process

    Denition 1. Random process A random (stochastic) process {Xt, t T } is a collection of random variables on the same probability space (, F , P ). The index set T is usually representing time and can be either an interval [t1, t2] or a discrete set. Therefore, the stochastic process X can be written as a function:

    X : R R,

    (t, ) X (t, )

    Stochastic Systems, 2013

    Filtration

    Observations:

    The amount of information increases with time. We use the concept of sigma algebras. We assume that information is not lost with increasing time Therefore the corresponding -algebras will increase over time when there is more information available.

    This concept is called ltration.

    Denition 2. Filtration/adapted process A collection {Ft}t0 of sub -algebras is called ltration if, for every s t, we have Fs Ft. The random variables {Xt : 0 t } are called adapted to the ltration Ft if, for every t, Xt is measurable with respect to Ft.

    Stochastic Systems, 2013

    Filtration

    Example 1. Suppose we have a sample space of four elements: = {1, 2, 3, 4}. At time zero, we dont have any information about which has been chosen. At time T 2 we know wether we will have {1 , 2 } or {3, 4}.
    r

    B r A
    r r

    D = {1} E = {2} F = {3} G = {4} -t

    r r r

    T 2

    Abbildung 1: Example of a ltration

    Stochastic Systems, 2013

    Dierence between Random process and smooth functions

    Let x() be a real, continuously dierentiable function dened on the interval [0, T ]. Its continuous dierentiability implies both a bounded total variation and a vanishing sum of squared increments: 1. Total variation:

    dx(t) dt < dt

    2. Sum of squares:

    ) N ( ( ( T) T) 2 lim x k x (k 1) =0 N N N k=1
    Random processes do not have either of these nice smoothness properties in general. This allows the desired wild and random behavior of the (sample) noise signals.

    Stochastic Systems, 2013

    Markov Process

    A Markov process has the property that only the instantaneous value X (t) is relevant for the future evolution of X . Past and future of a Markov process have no direct relation.

    Denition 3. Markov process A continuous time stochastic process X (t), t T, is called a Markov process if for any nite parameter set {ti : ti < ti+1} T we have

    P (X (tn+1) B |X (t1), . . . , X (tn)) = P (X (tn+1) B |X (tn))

    Stochastic Systems, 2013

    Transition probability

    Denition 1. Let X (t) be a Markov process. The function P (s, X (s), t, B ) is the conditional probability P (X (t) B | X (s)) called transition probability or transition function.

    This means it is the probability that the process X (t) will be found inside the area B at time t, if at time s < t it was observed at state X (s).

    Stochastic Systems, 2013

    Transition probability

    Geometric Brownian motion with =0.08 =0.2 50

    45

    40

    35 B

    30

    x(t)

    25

    20

    15

    10

    Xs t s s+t 25 t 30 35 40 45 50

    10

    15

    20

    Abbildung 2: Transition probability P (s, x, t + s, B ).

    Stochastic Systems, 2013

    Gaussian Process

    A stochastic process is called Gaussian if all its joint probability distributions are Gaussian. If X (t) is a Gaussian process, then X (t) N ((t), 2(t)) for all t. A Gaussian process is fully characterized by its mean and covariance function. Performing linear operations on a Gaussian process still results in a Gaussian process. Derivatives and integrals of Gaussian processes are Gaussian processes themselves (note: stochastic integration and dierentiation).

    Stochastic Systems, 2013

    Martingale Process

    A stochastic process X (t) is a martingale relative to ({Ft}t0, P ) if the following conditions hold:

    X (t) is {Ft}t0-adapted, E [|X (t)|] < for all t 0. E[X (t)|Fs] = X(s) a.s. (0 s t).

    The best prediction of a martingale process is its current value. Fair game model

    Stochastic Systems, 2013

    10

    Diusions

    A diusion is a Markov process with continuous trajectories such that for each time t and state X (t) the following limits exist

    (t, X (t)) (t, X (t))


    2

    := :=

    1 E [X (t + t) X (t)|X (t)], t0 t 1 2 lim E [{X (t + t) X (t)} |X (t)]. t0 t lim

    For these limits, (t, X (t)) is called drift and 2(t, X (t)) is called the diusion coecient.

    Stochastic Systems, 2013

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