Lesson 3: Basic theory of stochastic

processes

Umberto Triacca

Dipartimento di Ingegneria e Scienze dell’Informazione e Matematica

Università dell’Aquila,
[email protected]

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Probability space

We start with some definitions

A probability space is a triple (Ω, A, P), where
(i) Ω is a nonempty set, we call it the sample space.
(ii) A is a σ-algebra of subsets of Ω, i.e. a family of subsets closed
with respect to countable union and complement with respect to
Ω.
(iii) P is a probability measure defined for all members of A. That
is a function P : A → [0,1]P∞ such that P(A) ≥ 0 for all A ∈ A,
P(Ω) = 1, P(∪∞ A
i=1 i ) = i=1 P(Ai ), for all sequences Ai ∈ A
such that Ak ∩ Aj = ∅ for k 6= j.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Random Variable

A real random variable or real stochastic variable on (Ω, A, P) is a

function x : Ω → R, such that the inverse image of any interval
(−∞, a] belongs to A, i.e.
x −1 ((−∞, a]) = {ω ∈ Ω : x(ω) ≤ a} ∈ A for all a ∈ R.
We also say that the function x is measurable A.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic process

What is a stochastic process?

Let T be a subset of R.

A real stochastic process is a family of random variables

{xt (ω); t ∈ T }, all defined on the same probability space (Ω, A, P)

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

The set T is called index set of the process. If T ⊂ Z, then the

process {xt (ω); t ∈ T } is called a discrete stochastic process. If T
is an interval of R, then {xt (ω); t ∈ T } is called a continuous
stochastic process.

In the sequel we will consider only discrete stochastic processes.

Any single real random variable is a (trivial) stochastic process. In

this case we have {xt (ω); t ∈ T } with T ={t1 }

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes
When T = Z the stochastic process {xt (ω); t ∈ Z} becomes a
sequence of random variables.

It is important to keep in mind that the sequence

{xt (ω); t ∈ Z}

has to be understood as the function associating the random

variable xt with the integer t. Therefore the processes

x = {xt (ω); t ∈ Z} ,

y = {x−t (ω); t ∈ Z}
z = {xt−3 (ω); t ∈ Z}
are different. Although they share the same range, i.e. the same
set of random variables, the functions associating a random
variable with each integer t are different.
Umberto Triacca Lesson 3: Basic theory of stochastic processes
Stochastic processes: examples

Let A(ω) be a random variable defined on (Ω, A, P).

Consider the discrete stochastic process

{xt (ω); t ∈ Z}

where xt (ω) = A(ω) ∀t ∈ Z.

A slightly modified example is

xt (ω) = (−1)t A(ω).

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes: examples

Other processes are:

{yt (ω); t ∈ Z}, with yt (ω) = a + bt + ut (ω);
{zt (ω); t ∈ Z}, with zt (ω) = tut (ω).
where the random variables ut (ω) are IID.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Let
{xt (ω); t ∈ Z}
be a stochastic process defined on the probability space (Ω, A, P).
For a fixed ω ∗ ∈ Ω,
{xt (ω ∗ ); t ∈ Z}
is a sequence of real number called realization or sample function
of the stochastic process.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes
Consider the discrete stochastic process
{xt (ω); t ∈ N}
where xt (ω) ∼ N (0, 1) for t = 1, 2... and xt (ω)⊥xs (ω) for t 6= s.
The plot of a realization of this process is presented in Figure 1.

Figure : Figure 1
Umberto Triacca Lesson 3: Basic theory of stochastic processes
Stochastic processes

We note that for each choice of ω ∈ Ω a realization of the

stochastic process is determined. For example, if ω1 , ω2 ∈ Ω we
have that {xt (ω1 ); t ∈ Z} and {xt (ω2 ); t ∈ Z} are two possible
realizations of our stochastic process.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes
Consider the discrete stochastic process
{xt (ω); t ∈ N}
where
xt = log(t) + cos (A(ω))
A(ω) ∼ N(0, 1). Figure 2 shows the plot of two possible
realizations of this process.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes
In the following figure we present the plot of five possible
realization of a random walk stochastic process

Figure :

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Just as a random variable assigns a number to each outcome in a

sample space, a stochastic process assigns a sample function
(realization) to each outcome ω ∈ Ω. Each realization is a unique
function of time different from the others.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

The set of all possible realizations of a stochastic process

{{xt (ω); t ∈ Z}; ω ∈ Ω}

is called ensemble.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Consider a stochastic process {xt (ω); t ∈ Z}. It is important to

point out that all the random variables xt (ω) are defined on the
same probability space (Ω, A, P):

xt : Ω → R ∀t ∈ Z.

Therefore, for all s ∈ Z+ and t1 ≤ t2 ≤ · · · ≤ ts , the probability

P(a1 ≤ xt1 (ω) ≤ b1 , a2 ≤ xt2 (ω) ≤ b2 , . . . , as ≤ xts (ω) ≤ bs )

is well defined and so we can give the following definition.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Definition. Let {t1 , t2 , · · · , ts } be a finite set of integers, with

s ∈ Z+ .The joint distribution function of

(xt1 (ω), xt2 (ω), ..., xts (ω))

is defined by Ft1 ,t2 ,··· ,ts (b1 , b2 , · · · , bs ) = P(xt1 (ω) ≤ b1 , xt2 (ω) ≤
b2 , . . . , xts (ω) ≤ bs )
The family

Ft1 ,t2 ,··· ,ts (b1 , b2 , · · · , bs ); s ∈ Z+ , {t1 , t2 , · · · , ts } ⊂ Z



is called the finite dimensional distribution of the process.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Definition. Let {t1 , t2 , · · · , ts } be a finite set of integers, with

s ∈ Z+ . The stochastic process {xt (ω); t ∈ Z} is said Gaussian if
the joint distribution function of the random vector
(xt1 (ω), xt2 (ω), ..., xts (ω)) is normal for any subset of Z,
{t1 , t2 , · · · , ts } with s ≥ 1.

Thus a stochastic process is a Gaussian process if and only if all

distribution functions belonging to the finite dimensional
distribution of the process are normal.

Many real world phenomena are well modeled as Gaussian

processes.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

If we know the finite dimensional distribution of the process, we

are able to answer the questions such as:
1 Which is the probability that the process {xt (ω); t ∈ Z}
passes through [a, b] at time t1 ?
2 Which is the probability that the process {xt (ω); t ∈ Z}
passes through [a, b] at time t1 and through [c, d] at time t2 ?

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

The answers:
1 P({a ≤ xt1 (ω) ≤ b}) = Ft1 (b) − Ft1 (a)
2 P({a ≤ xt1 (ω) ≤ b, c ≤ xt2 (ω) ≤ d}) =
Ft1 ,t2 (b, d) − Ft1 ,t2 (a, d) − Ft1 ,t2 (b, c) + Ft1 ,t2 (a, c).

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

An important point: Is the knowledge of the finite dimensional

distribution of the process sufficient to answer all question about
the stochastic process are of interest?

Can the probabilistic structure of a stochastic process to be fully

described by the finite dimensional distribution of the process?

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Theorem. For any positive integer s, let {t1 , t2 , · · · , ts } be any

admissible set of values of t. Then under general conditions the
probabilistic structure of the stochastic process {xt (ω); t ∈ Z} is
completely specified if we are given the joint probability
distribution of (xt1 (ω), xt2 (ω), , xtn (ω)) for all values of s and for all
choices of {t1 , t2 , · · · , ts } (Priestly 1981, p.104).

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

We can conclude that a stochastic process is defined completely in

a probabilistic sense if one knows the joint distribution function of
(xt1 (ω), xt2 (ω), ..., xts (ω))

Ft1 ,t2 ,··· ,ts (b1 , b2 , · · · , bs )

for any positive integer s and for all choices of finite set of random
variables (xt1 (ω), xt2 (ω), ..., xts (ω)).

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

The stochastic process as model.

If we take the point of view that the observed time series is a finite
part of one realization of a stochastic process {xt (ω); t ∈ Z}, then
the stochastic process can serve as model of the DGP that has
produced the time series.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

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Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

In particular, since a complete knowledge of a stochastic process

requires the knowledge of the finite dimensional distribution of the
process, the time series model is given by the family

{Ft1 ,t2 ,··· ,ts (b1 , b2 , · · · , bs ); s ≥ 1, {t1 , t2 , · · · , ts } ⊂ Z}

where the form of the joint distribution functions

Ft1 ,t2 ,··· ,ts (b1 , b2 , · · · , bs ) is supposed known. It is clear that , in
general, this model contains too unknown parameters to be
estimated from observed data.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

If, for example, we assume that our model is the stochastic process
{xt (ω); t ∈ Z}, where xt ∼ N(µt , σt2 ) we have that
(   )
v − µt 2
Z b
1
Ft (b) = p exp − dv for t = 0 ± 1, ...
−∞ 2πσt2 σt

Thus considering only the univariate distributions, we have to

estimate a infinite number of parameters {µt , σt ; t ∈ Z}.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

This task is impossible

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

Consequently, some restrictions have to be made concerning the

stochastic process that is adopted as model. In particular, we will
consider
1 restrictions on the time-heterogeneity of the process;

2 restrictions on the memory of the process.

Umberto Triacca Lesson 3: Basic theory of stochastic processes

Stochastic processes

The first kind of restrictions enables us to reduce the number of

unknown parameters.

The second allows us to obtain a consistent estimate of unknown

parameters.

Umberto Triacca Lesson 3: Basic theory of stochastic processes