ACST358/818 Survival Models

Practice 2
This assignment is for exercise and will not be collected for marking.
Solution will be posted later.

1.

A Cox proportional hazards model is applied to the following data (in years) with one
covariate z:
Survival time ti

4*

8*

Covariate zi

where * denotes censored data.

(a) Assume a linear baseline hazard rate h0 (t ) t with parameter > 0. Find the maximum
likelihood estimates of and the coefficient of the covariate z.
(b) Use the likelihood-ratio test to determine whether the covariate has a significant effect on
the survival time at 5% level.
(c) Without any assumption on the baseline distribution, estimate using the partial
likelihood method.
(d) What is the partial likelihood-ratio test statistic for testing H 0 : 0 ?
(e) Use the Breslows estimate of the baseline cumulative hazard function to estimate the
probability of a life of age 2 with covariate z = 1 to die within next 3 years.

2.

A bank classifies the state of a loan as healthy, low-risk, high-risk or terminated. The
movement of the loan state is modelled by a Markov chain with the following annual
transition probabilities (transitions occur at the end of each year):
Healthy
Low-risk
High-risk
Terminated

Healthy
0.6
0.2
0
0

Low-risk
0.3
0.5
0.4
0

High-risk
0.1
0.3
0.4
0

Terminated
0
0
0.2
1

A healthy or low-risk loan at the start of a year is expected to produce an income of 2000 or
1200 during the year; whereas a loss of 400 is expected on a high-risk loan. A terminated loan
will not have any future income or loss.
(a) Calculate the probability that a currently healthy loan will be terminated in three years.
(b) What is the expected income from a healthy loan over next three years?
(c) Determine the total expected future income (including the current year) from a low-risk
loan.
(d) If a terminated loan incurred a fixed loss each year, what would be the total expected
future income in the long-run?

3.

The transition probability matrix of a Markov chain with state space S 1, 2,3, 4 is given by
0.7 0.1
0.3 0
A B

P
,
where
A
,
B
0.1 0.6
0.2 0

0 D

and

0 1
D

1 0

According to Question 3 of Tutorial Exercise 6, the limit lim P n does not exist. However,
n

n
0
0
lim lim P n may exist for some initial distributions . This is demonstrated in

the following questions.

n
0
(a) For an initial distribution 1(0) 2(0) 3(0) 4(0) , show that the limit lim
n
exists if and only if

0
0
1(0) q11 2(0) q21 3 1(0) q12 2(0) q22 4

where
q11 q12
2
q
Q I A
q
21 22

AB BD

0
(b) Identify the values of 1(0) 2(0) 3(0) 4(0) a b c d such that the limit

n
lim exists, and calculate this limit.

0
(c) Give an example of that is not a stationery distribution itself, such that the limit
n
0
lim lim P n exists.

4.

An insurer starts a business with an initial surplus 30 and assumes the following business
model:

A premium of amount 30 is received at the beginning of each year from the start of the
first year;
The claim payment X in each year has the following probability distribution:
Claim Payment x
Pr(X = x)

10

20

50

0.4

0.2

0.3

0.1

At the end of each year, if the surplus is over 30, a dividend equal to the excess over 30
is paid to shareholders;
At any time, if the surplus drops to 0 or is insufficient to pay claim, the insurer is out of
business.
(a) Construct a Markov chain model for the surplus of the insurer at the end of each year
(after paying out dividends, if any) and obtain its transition probability matrix.
(b) Calculate the expected present value of the total dividends paid to shareholders by the
insurer over its entire life time at interest rate 4% pa.

5.

A Markov chain

X n , n 0,1, 2, has five states (A, B, C, D, E) and the following one-step

55 :

transition probability matrix P pij

A
B
C
D
E

A
0.0
0.2
1.0
0.0
0.0

B
0.0
0.7
0.0
0.0
0.0

C
1.0
0.1
0.0
0.0
0.0

D
0.0
0.0
0.0
0.5
0.6

E
0.0
0.0
0.0
0.5
0.4

(a) Is the process irreducible?

(b) Does the process have a unique stationary distribution?
(c) Find all stationary distributions of the process.
(d) Is the process aperiodic? If not, specify which states are periodic and which are aperiodic.
(e) Determine if lim pij n exists for each pair i, j , where i, j {A, B, C, D, E}, and find
n

any limit that exists.