The purpose of this course is to equip students with theoretical knowledge and practical skills, which are necessary for the analysis of stochastic dynamical systems in economics, engineering and other fields.
More precisely, the objectives are
1. study of the basic concepts of the theory of stochastic processes;
2. introduction of the most important types of stochastic processes;
3. study of various properties and characteristics of processes;
4. study of the methods for describing and analyzing complex stochastic models.
Practical skills, acquired during the study process:
1. understanding the most important types of stochastic processes (Poisson, Markov, Gaussian, Wiener processes and others) and ability of finding the most appropriate process for modelling in particular situations arising in economics, engineering and other fields;
2. understanding the notions of ergodicity, stationarity, stochastic integration; application of these terms in context of financial mathematics;
It is assumed that the students are familiar with the basics of probability theory. Knowledge of the basics of mathematical statistics is not required, but it simplifies the understanding of this course.
The course provides a necessary theoretical basis for studying other courses in stochastics, such as financial mathematics, quantitative finance, stochastic modeling and the theory of jump - type processes.
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Week 1: Introduction & Renewal processes
Upon completing this week, the learner will be able to understand the basic notions of probability theory, give a definition of a stochastic process; plot a trajectory and find finite-dimensional distributions for simple stochastic processes. Moreover, the learner will be able to apply Renewal Theory to marketing, both calculate the mathematical expectation of a countable process for any renewal process
Week 2: Poisson Processes
Upon completing this week, the learner will be able to understand the definitions and main properties of Poisson processes of different types and apply these processes to various real-life tasks, for instance, to model customer activity in marketing and to model aggregated claim sizes in insurance; understand a relation of this kind of models to Queueing Theory
Week 3: Markov Chains
Upon completing this week, the learner will be able to identify whether the process is a Markov chain and characterize it; classify the states of a Markov chain and apply ergodic theorem for finding limiting distributions on states
Week 4: Gaussian Processes
Upon completing this week, the learner will be able to understand the notions of Gaussian vector, Gaussian process and Brownian motion (Wiener process); define a Gaussian process by its mean and covariance function and apply the theoretical properties of Brownian motion for solving various tasks
Week 5: Stationarity and Linear filters
Upon completing this week, the learner will be able to determine whether a given stochastic process is stationary and ergodic; determine whether a given stochastic process has a continuous modification; calculate the spectral density of a given wide-sense stationary process and apply spectral functions to the analysis of linear filters.
Week 6: Ergodicity, differentiability, continuity
Upon completing this week, the learner will be able to determine whether a given stochastic process is differentiable and apply the term of continuity and ergodicity to stochastic processes
Week 7: Stochastic integration & Itô formula
Upon completing this week, the learner will be able to calculate stochastic integrals of various types and apply Itô’s formula for calculation of stochastic integrals as well as for construction of various stochastic models.
Week 8: Lévy processes
Upon completing this week, the learner will be able to understand the main properties of Lévy processes; construct a Lévy process from an infinitely-divisible distribution; characterize the activity of jumps of a given Lévy process; apply the Lévy-Khintchine representation for a particular Lévy process and understand the time change techniques, stochastic volatility approach are other ideas for construction of Lévy-based models.
This module includes final exam covering all topics of this course