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- Stochastic Calculus
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in particular for R = r

Xn = 1000(1 + r)n , n = 0, 1, 2, . . .

Here the sample functions are of the form f (n) = 1000(1 + r)n , n =

0, 1, 2, . . ., where r ∈ (0.04, 0.05) The random variable X3 is given by

X3 = 1000(1 + R)3

100, 0.04 < y < 0.05

fY (y) =

0, otherwise

E(X3 ) = 1000E(Y 3 )

Z 1.05

= 1000 y 3 .100dy ≈ 1, 141.2

1.04

Z 1.05

E(Xn ) = 1000 y n .100dy

1.04

105

= [(1.05)n+1 − (1.04)n+1 ]

n+1

Cov(Xn , Xm ) = E(Xn Xm ) − E(Xn )E(Xm )

E(Xn Xm ) = 106 E(Y m+n )

Z 1.05

6

= 10 y n+ m .100dy

1.04

108

= [(1.05)m+n+1 − (1.04)m+n+1 ]

m+n+1

108

Cov(Xn , Xm ) = [(1.05)m+n+1 − (1.04)m+n+1 ]

m+n+1

105 105

− [(1.05)n+1 − (1.04)n+1 ] [(1.05)m+1 − (1.04)m+1 ]

n+1 m+1

∀t1 , t2 , . . . , tn ∈ R and ∀h ∈ R

Since the process is iid, the distribution of (Xt1 , Xt2 , . . . , Xtn ) and

(Xt1 +h , Xt2 +h , . . . , Xtn +h ) are same.

And for X to be Gaussian process, Xt has to be normal for each t.

1

(i) E[X(t)] = µX (t) = µX , ∀t ∈ R,

(ii) Cov[X(t), X(s)] = f (|t − s|), ∀t, s ∈ R

Z 2π

1

E[X(t)] = E[(cos(t + U )] = cos(t + u) du

0 2π

= 0, ∀t ∈ R

Cov[X(t), X(s)] = E[X(t)X(s)] − E[X(t)]E[X(s)]

1

E[X(t)X(s)] = [cos(t + s + 2U ) + cos(t − s)]

2

1

= cos(t − s), ∀t, s ∈ R

2

4. We need to show that

∀t1 , t2 , . . . , tn ∈ R and ∀h ∈ R

vector and covariance matrix are same.

Since it is covariance stationary

From above we conclude that the mean vector and Covariance matrix

of them are same and hence strictly stationary.

5. Note that for any k ∈ Z, outside the interval (k, k + 1], gk (t) = 0, and

in k < t ≤ k + 1, X(t) = Ak .

Thus

E[X(t)] = E[Ak ] = 1 ∀t ∈ R

∴ Cov[X(t), X(s)] = 1.

Again if for some l, k ∈ Z with l 6= k and l < s ≤ l + 1, k < t ≤ k + 1

∴ Cov[X(t), X(s)] = 0.

2

6.

= Xn E[Yn+1 |X1 , X2 , . . . Xn ]

= Xn E[Yn+1 ] [∵ Yi ’s are iid]

= Xn

7. Let Zn denote the gain of gambler in the nth game. The gambler

stands to gain 1 unit of money with probability p and to lose 1 unit of

money with probability q and Xn be the gambler’s fortune after the

nth game.

Therefore,

Xn = Z1 + Z2 + . . . + Zn

{Xn , n ≥ 0} is a martingale. since

= Xn + E[Zn+1 |X1 , X2 , . . . Xn ]

= Xn + E[Zn+1 ] [∵ zi ’s are iid]

= Xn [∵ E[Zn+1 = 0]]

a if sub − martingale

E[Xn+1 |X1 , X2 , . . . Xn ] ≥ Xn

E[Xn+1 |X1 , X2 , . . . Xn ] ≤ Xn

When p > 21 , the gambler’s fortune {Xn , n ≥ 0} is a sub-martingale

(check it).

rameter 1/6. Hence the number of occurrence of the event E in m

trials is renewal process.

3

9. Let {X(t), t ≥ 0} with X(0) = 0 is a process having independent

increments.

for t < s

= E[X(t)]2 + E[X(t)]E[(X(s) − X(t)]

(since the process has independent increments)

= E[X(t)]2 + E[X(t)](E[(X(s)] − E[X(t)])

Cov[X(s), X(t)] = E[X(t)]2 + E[X(t)](E[(X(s)] − E[X(t)]) − E[X(t)]E[X(s)]

= V ar[X(t)]

Therefore

10. Let U (t) = aW1 (t) + bW2 (t). We need to check that U (t) will satisfy

all the properties of Brownian motion.

(i) U (t) have the continuous sample path a.s., since W1 (t), W2 (t)

have the continuous sample path a.s.

(ii)

(iii) U (t) will have the stationary increments by the same argument.

(iv) since W1 (t)−W1 (s) and W2 (t)−W2 (s) follow normal distribution

with mean 0 and variance t − s,

U (t) − U (s) will also follow normal distribution.

V ar[U (t)−U (s)] = a2 V ar[W1 (t)−W1 (s)]+b2 V ar[W2 (t)−W2 (s)] = (a2 +b2 )(t−s)

have a2 + b2 = 1.

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