ELEC 321

Markov Process

Updated 2017-11-21

Note: this page is quite empty, visit the tutorial page on Markov Processes and review problem for more in-depth explanation and practice of Markov chains.

Example: Rating migration of bonds

Where is the state space: .

Since and ,

Thus

Now we may list the probabilities and add them

Probability from to default (in second year): Probability from AAA to :
AAA 0 0.9366
AA 0.0002 0.0583
A 0.0004 0.0040
default 1 0

Markov Chains Simulation