Stochastic process

temperature, and random movement such as Brownian

motion or random walks. Examples of random elds include static images, random terrain (landscapes), wind
waves or composition variations of a heterogeneous material.
A generalization, the random eld, is dened by letting
the variables parameters be members of a topological
space instead of limited to real values representing time.

1 Formal denition
properties

Stock market uctuations have been modeled by stochastic processes.

and

basic

1.1 Denition

In probability theory, a stochastic (/stokstk/) process, or often random process, is a collection of random
variables, representing the evolution of some system of
random values over time. This is the probabilistic counterpart to a deterministic process (or deterministic system). Instead of describing a process which can only
evolve in one way (as in the case, for example, of solutions of an ordinary dierential equation), in a stochastic or random process there is some indeterminacy: even
if the initial condition (or starting point) is known, there
are several (often innitely many) directions in which the
process may evolve.

Given a probability space (, F, P ) and a measurable

space (S, ) , an S-valued stochastic process is a collection of S-valued random variables on , indexed by a
totally ordered set T (time). That is, a stochastic process X is a collection

{Xt : t T }
where each Xt is an S-valued random variable on . The
space S is then called the state space of the process.

In the simple case of discrete time, as opposed to

continuous time, a stochastic process involves a sequence
of random variables and the time series associated with
these random variables (for example, see Markov chain,
also known as discrete-time Markov chain). One approach to stochastic processes treats them as functions
of one or several deterministic arguments (inputs; in
most cases this will be the time parameter) whose values
(outputs) are random variables: non-deterministic (single) quantities which have certain probability distributions. Random variables corresponding to various times
(or points, in the case of random elds) may be completely dierent. The main requirement is that these different random quantities all take values in the same space
(the codomain of the function). Although the random
values of a stochastic process at dierent times may be
independent random variables, in most commonly considered situations they exhibit complicated statistical correlations.

1.2 Finite-dimensional distributions

Let X be an S-valued stochastic process. For every nite
sequence T = (t1 , . . . , tk ) T k , the k-tuple XT =
(Xt1 , Xt2 , . . . , Xtk ) is a random variable taking values
in S k . The distribution PT () = P(XT1
()) of this
random variable is a probability measure on S k . This is
called a nite-dimensional distribution of X.
Under suitable topological restrictions, a suitably consistent collection of nite-dimensional distributions can be
used to dene a stochastic process (see Kolmogorov extension in the Construction section).

2 History of stochastic processes

Familiar examples of processes modeled as stochastic

time series include stock market and exchange rate uctuations, signals such as speech, audio and video, medical
data such as a patients EKG, EEG, blood pressure or

Stochastic processes were rst studied rigorously in the

late 19th century to aid in understanding nancial markets and Brownian motion. The rst person to describe
the mathematics behind Brownian motion was Thorvald
1

3 CONSTRUCTION

N. Thiele in a paper on the method of least squares published in 1880. This was followed independently by Louis
Bachelier in 1900 in his PhD thesis The theory of speculation, in which he presented a stochastic analysis of the
stock and option markets. Albert Einstein (in one of his
1905 papers) and Marian Smoluchowski (1906) brought
the solution of the problem to the attention of physicists,
and presented it as a way to indirectly conrm the existence of atoms and molecules. Their equations describing Brownian motion were subsequently veried by the
experimental work of Jean Baptiste Perrin in 1908.

When this condition is expressed in terms of probability

densities, the result is called the ChapmanKolmogorov
equation.
The Kolmogorov extension theorem guarantees the existence of a stochastic process with a given family of
nite-dimensional probability distributions satisfying the
ChapmanKolmogorov compatibility condition.

3.2 Separability, or what the Kolmogorov

extension does not provide

An excerpt from Einsteins paper describes the fundamentals of a stochastic model:

Recall that in the Kolmogorov axiomatization,
measurable sets are the sets which have a probability
or, in other words, the sets corresponding to yes/no
It must clearly be assumed that each indiquestions
that have a probabilistic answer.
vidual particle executes a motion which is independent of the motions of all other particles;
it will also be considered that the movements
of one and the same particle in dierent time
intervals are independent processes, as long as
these time intervals are not chosen too small.
We introduce a time interval into consideration, which is very small compared to the
observable time intervals, but nevertheless so
large that in two successive time intervals ,
the motions executed by the particle can be
thought of as events which are independent of
each other.

Construction

In the ordinary axiomatization of probability theory by

means of measure theory, the problem is to construct a
sigma-algebra of measurable subsets of the space of all
functions, and then put a nite measure on it. For this purpose one traditionally uses a method called Kolmogorov
extension.[1]

3.1

Kolmogorov extension

The Kolmogorov extension proceeds along the following

lines: assuming that a probability measure on the space
of all functions f : X Y exists, then it can be
used to specify the joint probability distribution of nitedimensional random variables f (x1 ), . . . , f (xn ) . Now,
from this n-dimensional probability distribution we can
deduce an (n 1)-dimensional marginal probability distribution for f (x1 ), . . . , f (xn1 ) . Note that the obvious
compatibility condition, namely, that this marginal probability distribution be in the same class as the one derived
from the full-blown stochastic process, is not a requirement. Such a condition only holds, for example, if the
stochastic process is a Wiener process (in which case the
marginals are all gaussian distributions of the exponential class) but not in general for all stochastic processes.

The Kolmogorov extension starts by declaring to be measurable all sets of functions where nitely many coordinates [f (x1 ), . . . , f (xn )] are restricted to lie in measurable subsets of Yn . In other words, if a yes/no question
about f can be answered by looking at the values of at
most nitely many coordinates, then it has a probabilistic
answer.
In measure theory, if we have a countably innite collection of measurable sets, then the union and intersection of all of them is a measurable set. For our purposes,
this means that yes/no questions that depend on countably
many coordinates have a probabilistic answer.
The good news is that the Kolmogorov extension makes it
possible to construct stochastic processes with fairly arbitrary nite-dimensional distributions. Also, every question that one could ask about a sequence has a probabilistic answer when asked of a random sequence. The bad
news is that certain questions about functions on a continuous domain don't have a probabilistic answer. One
might hope that the questions that depend on uncountably
many values of a function be of little interest, but the really bad news is that virtually all concepts of calculus are
of this sort. For example:
1. boundedness
2. continuity
3. dierentiability
all require knowledge of uncountably many values of the
function.
One solution to this problem is to require that the stochastic process be separable. In other words, that there be
some countable set of coordinates {f (xi )} whose values
determine the whole random function f.
The Kolmogorov continuity theorem guarantees that processes that satisfy certain constraints on the moments of
their increments have continuous modications and are
therefore separable.

5.3

Discrete time and continuous state space

Filtrations

together, is treated as being continuous and since the particle is constrained to the surface of the liquid by surGiven a probability space (, F, P ) , a ltration is a face tension, is at each point in time a vector parallel to
weakly increasing collection of sigma-algebras on , the surface. Thus, the random force is described by a
{Ft , t T } , indexed by some totally ordered set T , two-component stochastic process; two real-valued random variables are associated to each point in the index
and bounded above by F , i.e. for s,t T with s < t,
set, time, (note that since the liquid is viewed as being
homogeneous the force is independent of the spatial coordinates) with the domain of the two random variables
Fs Ft F
being R, giving the x and y components of the force.
A treatment of Brownian motion generally also includes
A stochastic process X on the same time set T is said to
the eect of viscosity, resulting in an equation of motion
be adapted to the ltration if, for every t T , Xt is Ft
known as the Langevin equation.[4]
-measurable.[2]

4.1

Natural ltration

5.3 Discrete time and continuous state

space

Given a stochastic process X = {Xt : t T } , the

natural ltration for (or induced by) this process is the If the index set of the process is N (the natural numbers),
ltration where Ft is generated by all values of Xs up to and the range is R (the real numbers), there are some
time s = t, i.e. Ft = ({Xs1 (A) : s t, A }) .
natural questions to ask about the sample sequences of a
A stochastic process is always adapted to its natural l- process {Xi}i N, where a sample sequence is {Xi()}i
N.
tration.

Classication

Stochastic processes can be classied according to the

cardinality of its index set (usually interpreted as time)
and state space.

5.1

1. What is the probability that each sample sequence is

bounded?
2. What is the probability that each sample sequence is
monotonic?
3. What is the probability that each sample sequence
has a limit as the index approaches ?

Discrete time and discrete state space

If both t and Xt belong to N , the set of natural numbers,

then we have models which lead to Markov chains. For
example:

4. What is the probability that the series obtained from

a sample sequence from f (i) converges?
5. What is the probability distribution of the sum?

(a) If Xt means the bit (0 or 1) in position t of a sequence

of transmitted bits, then Xt can be modelled as a Markov Main applications of discrete time continuous state
chain with two states. This leads to the error-correcting stochastic models include Markov chain Monte Carlo
Viterbi algorithm in data transmission.
(MCMC) and the analysis of Time Series.
(b) If Xt represents the combined genotype of a breeding
couple in the t th generation in an inbreeding model, it can
be shown that the proportion of heterozygous individuals 5.4 Continuous time and discrete state
in the population approaches zero as t goes to .[3]
space

5.2

Similarly, if the index space I is a nite or innite interval,

Continuous time and continuous state we can ask about the sample paths {Xt()}t I
space

The paradigm of continuous stochastic process is that of

the Wiener process. In its original form the problem was
concerned with a particle oating on a liquid surface, receiving kicks from the molecules of the liquid. The particle is then viewed as being subject to a random force
which, since the molecules are very small and very close

1. What
is
the
probability
bounded/integrable...?

that

it

is

2. What is the probability that it has a limit at

3. What is the probability distribution of the integral?

8 FURTHER READING

See also
List of stochastic processes topics
Covariance function
Dynamics of Markovian particles
Entropy rate (for a stochastic process)
Ergodic process
Gillespie algorithm
Interacting particle system
Law (stochastic processes)
Markov chain
Probabilistic cellular automaton

Klebaner, Fima C. (2011). Introduction to Stochastic

Calculus With Applications. Imperial College Press.
ISBN 1-84816-831-4.
Bruce Hajek (July 2006). An Exploration of Random Processes for Engineers.
An 8 foot tall Probability Machine (named Sir
Francis) comparing stock market returns to the randomness of the beans dropping through the quincunx pattern. Index Funds Advisors IFA.com.
Popular Stochastic Processes used in Quantitative
Finance. sitmo.com.
Interactive Web Application: Stochastic Processes
used in Quantitative Finance. TuringFinance.com.

Randomness

Addressing Risk and Uncertainty.

Statistical model
Stochastic calculus
Stochastic control

References

[1] Karlin, Samuel & Taylor, Howard M. (1998). An Introduction to Stochastic Modeling, Academic Press. ISBN 012-684887-4.
[2] Durrett, Rick (2010). Probability: Theory and Examples
(Fourth ed.). Cambridge: Cambridge University Press.
ISBN 978-0-521-76539-8.
[3] Allen, Linda J. S., An Introduction to Stochastic Processes
with Applications to Biology, 2nd Edition, Chapman and
Hall, 2010, ISBN 1-4398-1882-7
[4] Gardiner, C. Handbook of Stochastic Methods: for
Physics, Chemistry and the Natural Sciences, 3rd ed.,
Springer, 2004, ISBN 3540208828

Doob, J. L. (1953). Stochastic Processes. Wiley.

Random eld

Stationary process

Boris Tsirelson. Lecture notes in Advanced probability theory".

Further reading
Wio, S. Horacio, Deza, R. Roberto & Lopez, M.
Juan (2012). An Introduction to Stochastic Processes
and Nonequilibrium Statistical Physics. World Scientic Publishing. ISBN 978-981-4374-78-1.
Papoulis, Athanasios & Pillai, S. Unnikrishna (2001).
Probability, Random Variables
and Stochastic Processes.
McGraw-Hill Science/Engineering/Math. ISBN 0-07-281725-9.

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