Continuous stochastic process

Summary

In probability theory, a continuous stochastic process is a type of stochastic process that may be said to be "continuous" as a function of its "time" or index parameter. Continuity is a nice property for (the sample paths of) a process to have, since it implies that they are well-behaved in some sense, and, therefore, much easier to analyze. It is implicit here that the index of the stochastic process is a continuous variable. Some authors define a "continuous (stochastic) process" as only requiring that the index variable be continuous, without continuity of sample paths: in another terminology, this would be a continuous-time stochastic process, in parallel to a "discrete-time process". Given the possible confusion, caution is needed. Definitions Let (Ω, Σ, P) be a probability space, let T be some interval of time, and let X : T × Ω → S be a stochastic process. For simplicity, the rest of this article will take

Official source

https://en.wikipedia.org/wiki/Continuous_stochastic_process

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STOCHASTIC PROCESSES AND CONSTRUCTION OF BROWNIAN MOTION

Christophe-Aschkan Mery

This project offers a rigorous introduction to the tools needed to construct a continuous stochastic process. Among other things, we give a very detailed proof of the Kolmogorov continuity criterion. We then construct a Brownian Motion following the formalism of D. Revuz and M. Yor. That is, we see the BM as a linear isometry from a Hilbert space into a Gaussian space.

EPFL2013

The topic of this thesis is the study of several stochastic control problems motivated by sailing races. The goal is to minimize the travel time between two locations, by selecting the fastest route in face of randomly changing weather conditions, such as wind direction. When a sailboat is travelling upwind, the key is to decide when to tack. Since this maneuver slows down the yacht, it is natural to model this time lost by a "tacking penalty" which places the problem in the context of optimal stochastic control problems with switching costs. An objective of this work is to propose and to study mathematical models that capture some of the features of a sailing race, but which remain amenable to an explicit rigorous solution that can be proved to be optimal. We consider three different models in which the wind direction is described by a stochastic process. In the first model, we consider a wind that changes randomly only once. In the second model, the wind oscillates between two possible directions according to a continuous-time Markov chain. We exhibit a free boundary problem for the value function involving hyperbolic partial differential equations of Klein-Gordon type. The last model considers the wind direction as a Brownian motion. We prove the existence of a finite value function and exhibit a free boundary problem involving parabolic partial differential equations with non-constant coefficients. In these three models, the optimal solution consists of a partition of the state space into a region where it is optimal to tack immediately and a region where it is optimal to continue on the current tack. The boundaries between these regions are given by one or more "switching curves" and in the cases where we have been able to exhibit them, the optimality of the solution is established by a verification theorem based on the martingale method. We also solve two other control problems in which a player tries to minimize or maximize the exit time from an interval of a Brownian particle by controlling its drift and subject to a switching penalty. In each problem, the value function is written as the solution of a second order ordinary differential equations problem whose unknown boundaries are found by applying the principle of smooth fit. For both problems, we exhibit a candidate strategy as a function of the switching cost and we prove its optimality as well as its generic uniqueness.

EPFL2012

The subject of the present thesis is an optimal prediction problem concerning the ultimate maximum of a stable Lévy process over a finite interval of time. Such "optimal prediction" problems are of both theoretical and practical interest, in particular they have applications in finance. For instance, suppose that an investor has a long position in one financial asset, whose price is modelled by some stochastic process. The investor's objective is to determine a "best moment" at which to close out the position and to sell the asset at the highest possible price. This optimal decision must be based on continuous observations of the asset price performance and only on the information accumulated to date. Hence, the investor should use a prediction (forecasting) of the future evolution of the price of the financial security. We examine this problem in the case where the asset price is modelled by a Lévy process. Indeed, during the last several years, the application of Lévy processes in the modelling financial asset returns has become one of the active research directions in quantitative finance. Thus, this thesis contains suitable new results concerning Lévy processes. We derive the law of the supremum process associated with a strictly stable Lévy process with no negative jumps which is not a subordinator. We note that the latter problem dates back to 1973. In particular, we show that the probability density function of the supremum process can be expressed using an explicit power series representation or via an integral representation. We also derive the infinitesimal generator of the reflected process associated with a general strictly stable Lévy process. Throughout this thesis, we apply the theory of optimal stopping, the methods of fractional differential calculus, and some results from fluctuation theory. Implementing these theories in the context of Lévy processes requires the development of specific analytical results. In the case where the asset price is modelled by a spectrally positive stable Lévy process, we describe the optimal strategy under certain conditions on the model parameters. The optimal strategy is of the following form: the investor must stop the observation of the price process and sell the asset as soon as the associated reflected process crosses for the first time a particular stopping boundary. We also provide numerical estimates and simulation examples of the results obtained by using this strategy.

EPFL2007

EPFL2012

EPFL2007