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Conditional Markov chains: Properties, construction and structured dependence

Author

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  • Bielecki, Tomasz R.
  • Jakubowski, Jacek
  • Niewęgłowski, Mariusz

Abstract

In this paper we contribute to the theory of conditional Markov chains (CMCs) that take finitely many values and that admit intensity. We provide a method for constructing a CMC with given intensity and with given conditional initial law, and which is also a doubly stochastic Markov chain. We provide a martingale characterization for such process, and we discuss other useful properties. We define and give sufficient and necessary conditions for strong Markovian consistency and weak Markovian consistency of a multivariate CMC. We use these results to model structured dependence between univariate CMCs, that is, to model a multivariate CMC whose components are univariate CMCs with given laws. An example of potential application of our theory is presented.

Suggested Citation

  • Bielecki, Tomasz R. & Jakubowski, Jacek & Niewęgłowski, Mariusz, 2017. "Conditional Markov chains: Properties, construction and structured dependence," Stochastic Processes and their Applications, Elsevier, vol. 127(4), pages 1125-1170.
    • Handle: RePEc:eee:spapps:v:127:y:2017:i:4:p:1125-1170
    DOI: 10.1016/j.spa.2016.07.010
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    References listed on IDEAS

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    1. Amendinger, Jürgen, 2000. "Martingale representation theorems for initially enlarged filtrations," Stochastic Processes and their Applications, Elsevier, vol. 89(1), pages 101-116, September.
    2. Bielecki, Tomasz R. & Jakubowski, Jacek & Niewȩgłowski, Mariusz, 2012. "Study of dependence for some stochastic processes: Symbolic Markov copulae," Stochastic Processes and their Applications, Elsevier, vol. 122(3), pages 930-951.
    3. Biagini, Francesca & Groll, Andreas & Widenmann, Jan, 2013. "Intensity-based premium evaluation for unemployment insurance products," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 302-316.
    4. Ernst Eberlein & Fehmi Özkan, 2003. "The Defaultable Lévy Term Structure: Ratings and Restructuring," Mathematical Finance, Wiley Blackwell, vol. 13(2), pages 277-300, April.
    5. Tomasz R. Bielecki & Marek Rutkowski, 2000. "Multiple Ratings Model of Defaultable Term Structure," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 125-139, April.
    6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    Cited by:

    1. Edward Hoyle & Levent Ali Menguturk, 2020. "Generalised Liouville Processes and their Properties," Papers 2003.11312, arXiv.org, revised May 2020.
    2. Budhi Surya, 2021. "A new class of conditional Markov jump processes with regime switching and path dependence: properties and maximum likelihood estimation," Papers 2107.07026, arXiv.org.
    3. Tomasz R. Bielecki & Igor Cialenco & Shibi Feng, 2018. "A Dynamic Model Of Central Counterparty Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-34, December.

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