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In: Statistics and Probability

A stock trader at a brokerage firm has noticed that price changes in the shares of...

A stock trader at a brokerage firm has noticed that price changes in the shares of Summer House Bakery each trade are dependent upon the previous trade's price change. Her observations can be summarized by the following transition matrix. (We are assuming +1/8, 0, -1/8 are the only possible price changes for this stock).

​

Next Price Change

Most Recent Price Change

+1/8

0

-1/8

+1/8

.7

.2

.1

0

.3

.4

.3

-1/8

.2

.1

.7

​A) Provide a system of equations to find the long run behavior of the stock’s price changes.

B) Find the long run probability corresponding to each price change state.

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orchestra answered 2 years ago
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