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Markov Processes in Finance With Application to Stock Markets
Abstract
Important model that has evolved in the field of finance, is founded on the hypothesis of random walks and most often refers to a special category of Markov chain and Markov process. In these models the human race is presented as nothing more than a system with a large number of individual parts. If every human being acted totally independently of every other human being, then the human race as a whole would behave very much like a thermodynamic system. But people, in general, do not behave independently of each other. They have a tendency to cooperate and compete, which causes the human race to behave less like a thermodynamic system, and more like a complex adaptive system. The performed analysis in this chapter certifies the doubted that the discrete and continuous Markov processes as representations of stationary stochastic processes, cannot accurately anticipate the future trends.
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