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Lecture 7

The document discusses the discrete time Random Walk stochastic process, including its properties such as expected value, variance, and martingale property. It provides R code for plotting a random walk path and includes exercises for calculating probabilities related to the random walk model. Examples and solutions are presented to illustrate key concepts and parameters of the model.

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Orochi Scorpion
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15 views8 pages

Lecture 7

The document discusses the discrete time Random Walk stochastic process, including its properties such as expected value, variance, and martingale property. It provides R code for plotting a random walk path and includes exercises for calculating probabilities related to the random walk model. Examples and solutions are presented to illustrate key concepts and parameters of the model.

Uploaded by

Orochi Scorpion
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture -7

Random Walk Stochastic Process

1. Discrete time Random Walk when 𝛜𝐭 follows a coin toss or Bernoulli distribution.

Case-1

Case-2

Example-1
Solution

R-Code

# Define the time steps

t <- 0:5
# Define the corresponding random walk positions

X_t <- c(0, 1, 0, 1, 2, 1)

# Plot the random walk path

plot(t, X_t, type = "o", pch = 16, col = "blue", lwd = 2, ylim = c(min(X_t) - 1, max(X_t) + 1),

xlab = "Time Step (t)", ylab = "Position (X_t)", main = "Random Walk Path")

# Add grid for better readability

grid()

# Annotate points

text(t, X_t, labels = X_t, pos = 3, cex = 1.2, col = "red")

Note. The following figure shows ensemble of the realization of the discrete time Random Walk
Process

Properties

1. Expected Value
2. Variance

3. No mean Reversion
4. Martingale Property

5. Uncorrelated Increments
A Simple Random Walk Model

a. Definition and Probability Representation

b. Net Displacement or Profit

c. Understanding Key Parameters


Example-1

Example-2

Compute the probability of landing at origin using the simple random walk model.

Solution
Exercises

Q.1

Derive the probability distribution of landing on (I) even number of steps (ii) off number of
steps.

Q.2

Q.3

Q.4

Q.5

Find the probability that a symmetric random walk returns to the origin for the first time after exactly 4
steps. Write the sequences of path that are not valid in the given scenario.

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