Exercise Session 13, December 6th ,2006

Mathematics for Economics and Finance

Prof: Norman Schürho¤
TAs: Zhihua Chen (Cissy), Natalia Guseva

1. University is accepting freshmen. This University can not accommodate

more than 1060 students. Assume that each applicant accepts with prob-
ability 0.6. If University accepts 1700 students, what is the probability
that it will have too many acceptance.
2. Random variable X is said to have Pareto distribution with parameter ;
if it is continuously distributed with density:
( +1)
x ; if x > 1
fX (xj ) = :
0; otherwise
There is random sample x1 :::xn from P areto( ) available.
Derive ML estimator b, prove its consistency and …nd its asymptotic dis-
tribution.
3. Let X1 ; :::; Xn be a sample from a normal distribution with mean 1 and
variance 1, let Y1 ; :::; Yn be a sample from a distribution with mean 2
and variance 2 and let Z1 ; :::; Zn be a sample from a distribution with
mean 1 + 2 and variance 4. All three samples are independent. (a).
Find the maximum likelihood estimators of 1 and 2 : (b). Find the
Fisher Information Matrix (when n = 1). Use it to …nd the asymptotic
distribution of the MLE’s as n ! 1:
4. (a). Let be a …xed, integrable random variable and Fn an arbitrary
…ltration. Show that Xn = E( =Fn ) is a martingale.
(b). Let X1 ; :::; Xn be a sequence of independent r.v.’s with mean 0.
Set Fn = (X1 ; :::; Xn ) the -…eld generated by X1 ; :::; Xn : Let Mn =
P n
Xi : Show that Mn is a martingale. Now, take Mn = Sn2 n; where
i=1 P
n
Sn = i=1 Xi and assume that the Xi all have variance 1. Show that Mn
is a martingale.
(c). Suppose you start with a franc and you are tossing a fair coin inde-
pendently. If it turns up head you double your fortune, tails you go broke.
Let Mn be your fortune at time n; i.e., if you let X1 ; :::; Xn be independent
r.v.’s that are equal to 2 with probability 0.5 and to 0 with probability
0.5, then show Mn = X1 ::: Xn is a martingale.