Name: Aisyah Amatul Ghina

NIM: 29019023

Stochastic Process
A stochastic process is a collection of random variables indexed by time. Random
variable is a variable whose value is determined by the outcome of a chance experiment.
A random variable may be either discrete or continuous. A stochastic process has
discrete-time if the time variable takes positive integer values, and continuous-time if
the time variable takes positive real values.
1. Random Walk is a stochastic process in which the change in the random
variable is uncorrelated with past changes.
Hence the change in the random variable cannot be forecasted. For a random
walk, there is no pattern to the changes in the random variable, as the existence
of any pattern would mean that the changes can be forecasted.
Example: A drunkard leaving a bar. The drunkard moves a random distance ut at
time t, and, continuing to walk indefinitely, will eventually drift farther and
farther away from the bar.
2. Wiener Process is a continuous-time analogue of the simple random walk. This
process is also known as the standard (simplest form) Brownian Motion. The
American mathematician Norbert Wiener gave the definition and properties in a
series of papers starting in 1918.
Generally, the terms Brownian motion and Wiener process are the same,
although Brownian motion emphasizes the physical aspects and Wiener process
emphasizes the mathematical aspects.
A standard (one-dimensional) Wiener process is a stochastic process {Wt}t≥0+
indexed by nonnegative real numbers t with the following properties:
(1) W0 = 0.
(2) With probability 1, the function t → Wt is continuous in t.
(3) The process {Wt}t≥0 has stationary, independent increments.
(4) The increment Wt+s − Ws has the NORMAL(0, t) distribution.
3. Brownian Motion is the limit of the discrete case random walk.
Brownian motion is the physical phenomenon named after the English botanist
Robert Brown who discovered it in 1827. Brownian motion is the zig-zagging
motion exhibited by a small particle, such as a grain of pollen, immersed in a
liquid or a gas. Albert Einstein gave the first explanation of this phenomenon in
1905. He explained Brownian motion by assuming the immersed particle was
constantly buffeted by the molecules of the surrounding medium. Since then the
abstracted process has been used for modeling the stock market and in quantum
mechanics.
Brownian motion is a martingale. It has a number of other interesting properties.
One is that realizations, while continuous, are differentiable nowhere with
probability 1. Realizations are fractals. No matter how much you magnify a
portion of graph of a realization, the result still looks like a realization of a
Brownian motion.
Brownian motion can easily be generalized to multiple dimensions. An n-
dimensional Brownian motion is simply an n-dimensional vector of n
independent Brownian motions.
Name: Aisyah Amatul Ghina
NIM: 29019023
References:
 Gujarati, D. N., & Porter, D. (2009). Basic Econometrics Mc Graw-Hill
International Edition.
 https://ocw.mit.edu/courses/mathematics/18-s096-topics-in-mathematics-
with-applications-in-finance-fall-2013/lecture-
notes/MIT18_S096F13_lecnote5.pdf
 http://www.math.unl.edu/~sdunbar1/MathematicalFinance/Lessons/Brownia
nMotion/Definition/definition.pdf
 Last lecture’s presentation.