## IT443

### Course Name:

Stochastic Processes (IT443)

### Programme:

### Category:

### Credits (L-T-P):

### Content:

Discrete-time Markov chains: Definition and examples of discrete-time Markov chains, Chapman-Kolmogorov equations, Long run behaviour of Markov chains, Absorption probabilities and expected times to absorption, Statistical aspects of Markov chains, The mover-stayer model, Application of a Markov chain and mover-stayer model to modelling.Continuous-time Markov chains: Definition of a continuous-time Markov chain and examples, Poisson process, The Kolmogorov differential equations, Limiting behaviour of continuous-time Markov chains, birth and death processes, Statistical aspects and applications of continuous-time Markov chains. Discrete-time martingales: Conditional expectation, Definition of a martingale and examples, Optional stopping theorem, Applications to random walks, Martingales in option pricing- a simple example; Brownian Motion and its generalizations: Motivation, definition and properties of Brownian motion, Geometric Brownian motion, Continuous-time martingales, Optional stopping theorem;Stochastic calculus: Stochastic integration, Ito’s formula, Black-Scholes option pricing formula