Stochastic Modelling with Randomised Markov Bridges
Abstract
We consider the filtering problem of estimating a hidden random variable by noisy observations. The noisy observation process is constructed by a randomised Markov bridge (RMB) of which terminal value is set to . That is, at the terminal time , the noise of the bridge process vanishes and the hidden random variable 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 , the current observation , the initial observation , and the a priori distribution of at . 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.
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