Overview Of Stochastic Process
This article provides an overview of stochastic process and fundamental mathematical concepts that are important to understand.
Stochastic variable is a variable that moves in random order. Exchange rates, interest rates or stock prices are stochastic in nature. Stochastic variables can follow wiener or Itos process. I will start by explaining what stochastic process is.
These concept are crucial to understand in machine learning, finance and risk management.
What Is A Stochastic Process?
Think of a stochastic process as how smoke particles collide with each other. Their unpredictable movements and collisions are random and are referred to as Brownian Motion.
Interest rate is a variable that changes its value over time. It is not straightforward to forecast its movements.
There are two ways to classify a stochastic process:
- Discrete: When changes in value of a variable are at fixed points in time. Only certain values can be chosen for a discrete variable.
- Continuous: When changes in value of a variable are continuous. Value of a continuous variable can take any value within a certain range.
Stochastic process can also be Markov.
