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Publication Detail
Stochastic modelling with randomized Markov bridges
  • Publication Type:
  • Authors:
    Macrina A, Sekine J
  • Publication date:
  • Pagination:
    307, 333
  • ISBN-13:
  • Status:
  • Book title:
    Financial Informatics: An Information-based Approach To Asset Pricing
We consider the filtering problem of estimating a hidden random variable X by noisy observations. The noisy observation process is constructed by a randomized Markov bridge (RMB) (Zt)tν[0,T] of which terminal value is set to ZT = X. That is, at the terminal time T, the noise of the bridge process vanishes and the hidden random variable X is revealed. We derive the explicit filtering formula, governing the dynamics of the conditional probability process, for a general RMB. It turns out that the conditional probability is given by a function of current time t, the current observation Zt , the initial observation Z0, and the a priori distribution ε of X at t = 0. As an example for an RMB, we explicitly construct the skew-normal randomized diffusion bridge and show how it can be utilized to extend well-known commodity pricing models andhowone may propose novel stochastic price models for financial instruments linked to greenhouse gas emissions.
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