UNIVERSITY OF CAPE TOWN

DEPARTMENT OF STATISTICAL SCIENCES

STA3045F : EXAM : June, 2012
Internal Examiners: Dr. M Lacerda, Dr. M. Varughese
External Examiner: Prof. W. Conradie
Total number of pages: 7 Full marks: 100
Time: 3 hours
Instructions: Answer each section in a separate book!
SECTION A
Answer this section in a separate book.
QUESTION 1 [5 marks]
People arrive at a bus stop according to a Poisson process with rate per hour. Assume
that the arrival time T (measured in hours) of the bus is a uniform random variable on
[0,1] and that T is independent of the arrival times of the people. Let N be the number
of people at the bus stop when the bus arrives.
(a) Find the probability distribution of the random variable E[N|T].
(b) Find E[N].
(c) Find the probability that no-one is at the bus stop when the bus arrives.
QUESTION 2 [13 marks]
Let {N(t), t 0} be a pure birth process with intensity function
n
, where n is the
state of the process.
(a) Write down the postulates for a pure birth process.
(b) Suppose that the process starts in state k 0. Show that the probability P
n
(t)
that the process is in state n at time t satises the dierential equations
d
dt
P
k
(t) =
k
P
k
(t)
d
dt
P
n
(t) =
n
P
n
(t) +
n1
P
n1
(t) for n > k.
(c) Consider a Yule process with k = 1 and
n
= n for n 1. Show that P
n
(t) is a
geometric probability. Hint: Develop a recursive argument.
1
QUESTION 3 [8 marks]
Actuarial models of HIV/AIDS have been used for life insurance underwriting. Suppose
that individuals are classied into one of ve states: (0) Not at risk of contracting HIV,
(1) At risk of contracting HIV, (2) HIV positive, (3) Sick with AIDS, and (4) Dead.
Transitions between these states are modelled with a time-homogeneous, continuous-
time Markov process described by the diagram below:
(0)
Not At
Risk
(1)
At
Risk
(2)
HIV
Positive
(3)
Sick
AIDS
(4) Dead

0

1

2

3

0

1

2

1
(a) Identify the communicating classes of this Markov chain and indicate whether each
is open or closed.
(b) Write down the generator for this process.
(c) Derive an expression for the probability that a person with AIDS will die after
time t.
(d) Comment on the validity of the assumption of time homogeneity in this example.
QUESTION 4 [19 marks]
A factory has two machines and one repairman. Each machine fails independently after
an exponential amount of time with rate . The time taken to repair a machine is
exponentially distributed with rate . Suppose that the number of broken machines
{X
t
, t 0} at time t is modelled as a continuous-time Markov process.
(a) Draw a state transition diagram for this process indicating the transition rates.
(b) Find the stationary distribution.
(c) Carefully explain how you would simulate n events of this process.
(d) Suppose that the following data were observed:
Time 0.9 1.7 2.2 2.8 3.3 3.9 4.9 5.8 6.6 7.6 7.8 8.6 9.3
State 0 1 2 1 0 1 2 1 2 1 0 1 2
Obtain maximum likelihood estimates for and .
(e) Use your estimates from part (d) to compute the average number of broken ma-
chines.
2
QUESTION 5 [5 marks]
Consider a random walk {S
n
, n = 0, 1, . . .} on Z.
(a) Show that the number of paths from (0, 0) to (n, x), where x 0, that never cross
but may touch the t-axis is given by
_
n
n+x
2
_

_
n
n+x
2
+ 1
_
.
(b) Hence, show that the number of paths from (0, 0) to (n, 0), where n is even, that
never cross but may touch the t-axis is given by the Catalan numbers
C
n/2
=
1
n
2
+ 1
_
n
n
2
_
for n = 0, 2, 4, . . .
SECTION B
Answer this section in a separate book.
QUESTION 6 [10 marks]
(a) Let (, F, P) be a probability space and let N = {1, 2, ..., n
0
}, n
0
. Dene a
ltration with respect to the probability space and the index set N. (1)
(b) A coin is tossed twice in succession.
(i) Let A be the event that there is at least one head. What is the -eld
generated by A? (1)
(ii) What is the most powerful ltration for this random experiment? (3)
(c) Let X be a random variable and let g : be continuous and strictly increas-
ing. Show that g(X) is a random variable. (5)
QUESTION 7 [21 marks]
Two candidates, A and B run for an election with n voters. They obtain a and b votes
respectively, where a > b.
(a) Let S
k
= (# As votes) (# Bs votes) after k votes are counted. Show that after
k votes are counted, that the number of votes for A is
k+S
k
2
and the number of
votes for B is
kS
k
2
. (3)
(b) Show that
P(S
k
= S
k+1
+ 1|S
k+1
) =
k + 1 S
k+1
2(k + 1)
. (2)
3
(c) Let X
k
=
S
nk
nk
for 0 k n 1. Show that X
n
is a martingale. (8)
(d) Let T = min{k : X
k
= 0} and T

= min(n 1, T).
(i) Show that the optional stopping theorem is applicable to the stopping time
T

. (2)
(ii) By applying the optional stopping theorem to T

, calculate the probability

that candidate A always leads the voting race. (6)
QUESTION 8 [10 marks]
(a) Dene Standard Brownian Motion, B
t
. (2)
(b) Suppose W
t
is Brownian motion with drift = 0.3 and = 0.2. What is the
probability that W
2
> 1 given that the initial value of the process is zero? (3)
(c) Show that B
t
is not dierentiable at t = t
0
with probability 1 for any t
0
> 0.
You may use the fact that:
W
i
(t) =
_
tB
1/t
, t > 0
0 , t = 0
is Standard Brownian Motion. (5)
QUESTION 9 [10 marks]
(a) Consider the Ito integral, I(t) =
_
t
0
_
|B
s
|dB
s
.
(i) The integral
_
t
0
g(s, B
s
)dB
s
is mean square integrable if
_
t
0
E[g(s, B
s
)
2
]ds <
. Show that I(t) is mean square integrable. (2)
(ii) Hence calculate the variance of I(t). (2)
Note that for a normal random variable with mean 0 and variance s, we
have: E[|Z|] =
_
2s

.
(b) Consider the stochastic dierential equation:
dS
t
= S
t
dt + S
t
dB
t
.
Show that S
t
/S
0
is log-normally distributed. (6)
4
FORMULAE
f(x) =
t
1
e

ij
(t) =

k
p
ik
(t)q
kj
p

ij
(t) =

k
q
ik
p
kj
(t)

j
=

j
q
jj

i
q
ii

j
=

j
/q
jj

i
/q
ii
p
ij
(t) =

n=0
[

R
n
]
ij
(qt)
n
exp{qt}
n!
(Q) = ln p
0
(y
0
) +

j=i
B
ij
ln q
ij
+

i
q
ii
A
i
P[N < ] = 1
E
_
sup
n0
|X
Nn
|

<
E[N] <
E
_
|X
n+1
X
n
|

Y
0
, . . . , Y
n

K for n < N and some K <

P[N < ] = 1
E[|X
N
|] <
lim
n
E[X
n
1
N>n
] = 0
P[N < ] = 1
E
_
X
2
Nn

K n and some K <

E[I(t)
2
] =
_
t
0
g(u, B
u
)
2
du, where I =
_
t
0
g(s, B
s
)dB
s
.
5