Quiz 1
Describe:
1. Poisson Process:
Let λ>0 be fixed. The counting process {N(t),t∈[0,∞)} is called a Poisson process with rates λ if all the
following conditions hold:
N(0)=0;
N(t) has independent increments;
the number of arrivals in any interval of length τ>0 has Poisson(λτ) distribution.
Another Definition of Poisson distribution is Let λ>0 be fixed. The counting process {N(t),t∈[0,∞)} is
called a Poisson process with rate λ if all the following conditions hold:
N(0)=0;
N(t) has independent and stationary increments
we have P(N(Δ)=0)=1−λΔ+o(Δ),P(N(Δ)=1)=λΔ+o(Δ),P(N(Δ)≥2)=o(Δ).
If N(t) is a Poisson process with rate λ, then the inter-arrival times X1, X2, ⋯ are independent and
Xi ∼ Exponential (λ), for i=1,2,3,⋯.
Remember that if XX is exponential with parameter λ>0λ>0, then XX is a memoryless random
variable, that is
P(X>x+ a|X>a) = P(X>x), for a,x≥0.P(X>x+ a|X>a)=P(X>x), for a,x≥0.
Thinking of the Poisson process, the memoryless property of the inter-arrival times is consistent with
the independent increment property of the Poisson distribution. In some sense, both are implying
that the numbers of arrivals in non-overlapping intervals are independent.
2. Brownian Motion:
• Brownian motion is a stochastic process {X(t), t ≥ 0 } with the following properties.
1. X(0) = 0, unless stated otherwise.
2. for any 0 ≤ t0 < t1 < · · · < tn, the random variables X(tk) − X(tk−1) for 1 ≤ k ≤ n are independent.b
3. for 0 ≤ s < t, X(t) − X(s) is normally distributed with mean µ(t − s) and variance σ2(t − s), where µ
and σ is not equal to 0 are real numbers.
Such a process will be called a (µ, σ) Brownian motion with drift µ and variance σ(square)
• The existence and uniqueness of such a process is guaranteed by Wiener’s theorem.
• Although Brownian motion is a continuous function of t with probability one, it is almost nowhere
differentiable.
• The (0, 1) Brownian motion is also called the Wiener process.
3. Martingale:
In full generality, a stochastic process {\displaystyle Y:T\times \Omega \to S}taking value in a Banach
space {\displaystyle S}is a martingale with respect to a filtration {\displaystyle \Sigma
_{*}}and probability measure {\displaystyle \mathbb {P} } if
Σ∗ is a filtration of the underlying probability space (Ω, Σ, {\displaystyle \mathbb {P} });
Y is adapted to the filtration Σ∗, i.e., for each t in the index set T, the random variable Yt is a
Σt-measurable function;
for each t, Yt lies in the Lp space L1(Ω, Σt, {\displaystyle \mathbb {P} } S), i.e.{\displaystyle
\mathbf {E} _{\mathbb {P} }(|Y_{t}|)<+\infty ;}
for all s and t with s < t and all F ∈ Σs,{\displaystyle \mathbf {E} _{\mathbb {P} }\left([Y_{t}-
Y_{s}]\chi _{F}\right)=0,}
Where χF denotes the indicator function of the event F. In Grimmett and Stirzaker's Probability and
Random Processes, this last condition is denoted which is known as a general form of conditional
expectation.
It is important to note that the property of being a martingale involves both the filtration and the
probability measure (with respect to which the expectations are taken). It is possible that Y could be
a martingale with respect to one measure but not another one; the Girsanov theorem offers a way
to find a measure with respect to which an Itō process is a martingale.
4. Random Variable:
A random variable is a function that assigns a real value to each outcome in S (Numerical Outcome
from an experiment)
P(X ∈ A) = P(X-1 (A)) where A is set of real numbers
X-1 (A) is the event consisting of all points s ∈ S such that X(S) ∈ A where S = Sample Space
1. Distribution function F of the random variable X =
F(x) = P (X≤ x) = P(X ∈ (-∞, x]) where x is real number
2. Random Variable is set to be discrete when its set of possible values is countable. For
discrete random variables
F(x) = ∑ P( X = y)
y≤x
3. A random variable is said to be continuous if there is probability density function F(x). Joint
distribution system F of random variable X and Y is written as
F(x,y) = Fx(x) Fy(y) for all x and y.
5.Continuous Markov Process:
A stochastic process {X(t) : t ≥ 0} with discrete state space S is called a continuous-time Markov chain
(CTMC) if for all t ≥ 0, s ≥ 0, i ∈ S, j ∈ S, The equation is given by
P(X(s + t) = j|X(s) = i, {X (u) : 0 ≤ u < s}) = P(X(s + t) = j|X(s) = i) = Pij (t).
Where Pij (t) is the probability that the chain will be in state j, t time units from now, given it is in
state i now. For each t ≥ 0 there exists a transition matrix P(t) = (Pij (t)), and P(0) = I which is the
identity matrix.
A CTMC makes transitions from state to state, independent of the past, according to a discrete-time
Markov chain, but once entering a state remains in that state, independent of the past, for an
exponentially distributed amount of time before changing the state again. Thus a CTMC can simply
be defined as a transition matrix P = (Pij ), explaining how the chain changes state step-by-step at
transition epochs, together with a set of rates {ai : i ∈ S}, the holding time rates. Every time state i is
visited, the chain spends, on average, E(Hi) = 1/ai units of time there before moving on to other
state.
