English

Stochastic Modelling with Randomised Markov Bridges

Probability 2019-12-17 v4

Abstract

We consider the filtering problem of estimating a hidden random variable XX by noisy observations. The noisy observation process is constructed by a randomised Markov bridge (RMB) (Zt)t[0,T](Z_t)_{t\in [0,T]} of which terminal value is set to ZT=XZ_T=X. That is, at the terminal time TT, the noise of the bridge process vanishes and the hidden random variable XX 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 tt, the current observation ZtZ_t, the initial observation Z0Z_0, and the a priori distribution ν\nu of XX at t=0t=0. As an example for an RMB we explicitly construct the skew-normal randomised diffusion bridge and show how it can be utilised to extend well-known commodity pricing models and how one may propose novel stochastic price models for financial instruments linked to greenhouse gas emissions.

Keywords

Cite

@article{arxiv.1411.1214,
  title  = {Stochastic Modelling with Randomised Markov Bridges},
  author = {Andrea Macrina and Jun Sekine},
  journal= {arXiv preprint arXiv:1411.1214},
  year   = {2019}
}

Comments

36 pages, 5 figures

R2 v1 2026-06-22T06:48:48.234Z