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THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF RISK AND ACTUARIAL STUDIES
SEMESTER 2 2013
ACTL2003: STOCHASTIC MODELS FOR ACTUARIAL
APPLICATIONS
Final Examination
INSTRUCTIONS:
Time allowed: 2 hours
Reading time: 10 minutes
This examination paper has 24 pages
Total number of questions: 7
Total marks available: 100 points
Marks allocated for each part of the questions are indicated in the examination
paper. All questions are not of equal value.
This is a closed-book test and no formula sheets are allowed except for the Formulae and Tables for Actuarial Exams (any edition). IT MUST BE WHOLLY
UNANNOTATED.
Use your own calculator for this exam. All calculators must be UNSW approved.
Answer all questions in the space allocated to them. If more space is required,
use the additional pages at the end.
Show all necessary steps in your solutions. If there is no written solution,
then no marks will be awarded.
All answers must be written in ink. Except where they are expressly required,
pencils may be used only for drawing, sketching or graphical work.
THE PAPER MAY NOT BE RETAINED BY THE CANDIDATE.
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Question

[26 marks]

[6 marks]

[7 marks]

[23 marks]

[15 marks]

[8 marks]

[15 marks]

Mark

Total

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Question 1. (26 marks)

Phone enquiries arriving at a big technology company wait for an average of 10
minutes before being answered by a receptionist who directs the enquires either
to junior consultants (J), senior consultants (S) or the further investigation team
(I). Four enquiries in ten are directed to junior consultants, five in ten to senior
consultants, and one in ten to the further investigation team.
An enquiry that is directed to the further investigation team spends an average
of 20 minutes there, after which 50% of cases are closed immediately (C), 25% are
sent to a senior consultant and 25% to a junior consultant.
An enquiry requiring attendance from a junior consultant takes an average of
20 minutes to close, and an enquiry requiring attendance from a senior consultant
takes an average of 60 minutes to close.
It is suggested that a time-homogeneous Markov process with states A, J, S, I,
and C could be used to model the progress of enquires through the system. Here, an
enquiry in state A means that it is waiting to be answered by a receptionist. And an
enquiry in state J, S and I means that it is being handled by a junior consultant,
a senior consultant and the further investigation team, respectively. An enquiry in
state C means that it has been closed.
(i) Write down the matrix of transition rates, {qij : i, j = A, I, J, S, C}, of such a
Markov model. [5 marks]

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(ii) Calculate the proportion of enquires which are eventually directed to junior
consultants. [2 marks]

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(iii) Derive expressions for the probability that an enquiry arriving at time 0 is:
(a) yet to be answered by the receptionist at time t; [4 marks]
(b) undergoing further investigation at time t. [6 marks]

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(iv) Let mi denote the expectation of the time until being closed for an enquiry
currently in state i. Calculate the expectation of the time until being closed for a
newly-arrived enquiry. [9 marks]

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Question 2. (6 marks)
Let {X(t) : t 0} be a continuous time-homogeneous Markov jump process with
two states 0 and 1, and transition rates q01 = and q10 = .
Let Oi (t) denote the total amount of time spent in state i up until time t (the
occupation time in state i by time t). Suppose = 0.1 and = 0.2. Calculate the
expected occupation time in state 1 by time t = 10 given that the continuous-time

Markov chain is starting in state 0 at time 0. (Hint: P0,0 (t) = +

+ +
e(+)t
t
and Oi (t) = 0 I{X(s) = i}ds where I{} is the indicator function.)

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Question 3. (7 marks)
Consider the time series model: Xt = 2cXt1 c2 Xt2 + Zt , where Zt is a white
noise process with variance 2 .
(i) Find the values of c such that the process is stationary. [5 marks]

(ii) For c taking values such that the time series process is stationary, the model is
an ARIM A(p, d, q) process. Identify the values of p, d and q. [2 marks]

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Question 4. (23 marks)

Consider the time series model: Xt = a + bXt1 + cXt2 + Zt , where Zt is a white
noise process with variance 2 .
(i) Now suppose that a = 0.7, b = 0.4 and c = 0.12.
(a) Calculate E[Xt ]. [4 marks]

(b) Calculate the autocorrelations (1), (2) and (3). [9 marks]

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(This page can only be used to answer Question 4(i)(b).)

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(c) Describe the behavior of the autocorrelation function (k) and the kth partial
autocorrelation function (k) as k . [4 marks]

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(ii) Now suppose a = c = 0 and you have obtained the following sample autocorrelations:
(1) (2) (3) (4) (5) (6) (7) (8) (9)
0.800 0.645 0.519 0.414 0.331 0.265 0.212 0.170 0.137
Suggest an appropriate value for b and justify your answer. [6 marks]

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Question 5. (15 marks)

The following sequence of independent pseudo random numbers from a uniform
distribution over the interval [0, 1] has been generated by a computer:
U1 , U2 , , Un ,
where n is a known positive integer.
(i) Let X be an exponential random variable with mean 21 . Outline a procedure for
1
generating n independent random numbers for 1+X
3 by making use of the available
pseudo random numbers. [3 marks]

1
(ii) Write down the Monte Carlo estimator for E[ 1+X
3 ] using the random numbers
obtained in (i). [2 marks]

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1
(iii) Provide a method to simulate E[ 1+X
3 ] with reduced variance compared with
the estimator obtained in (ii) using the same sequence U1 , U2 , , Un . You should
provide the algorithm and prove in detail that the variance is reduced when the
method you provide is used. [10 marks]

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Question 6. (8 marks)

Let {Wt }t0 be a standard Brownian motion. Is { tWt }t0 a Brownian motion?
Justify your answer.

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Question 7. (15 marks)

Let {Yt } be a stationary AR(3) process satisfying
Yt = 1 Yt1 + 2 Yt2 + 3 Yt3 + Zt ,
where Zt is a white noise process with variance 2 .
Define (h) = Cor(Yt , Yt+h ) and the matrices

(0)
(1)
(h 1)
(1)
(1)
(0)
(h 2)
..

=
h =

. .
..
..
.
.
h
..
..

.
.
(h)
(h 1) (h 2)
(0)

xh1
xh2

Write xh = .. = 1
h h . Prove that x33 = 3 and xhh = 0 for h > 3.
.

xhh

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(This page can only be used to answer Question 7.)

END OF PAPER

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