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ACTL 2003
STOCHASTIC MODELS
FOR ACTUARIAL APPLICATIONS
FINAL EXAMINATION
n
X
Yj .
j=1
(i) (4 marks) Verify that the Markov property holds for X1 , X2 , . . . , Xn , . . . and explain
why the sequence Y1 , Y2 , . . . , Yn , . . . does not form a Markov chain.
(ii) (2 marks) Write down the transition matrix of the Markov chain X.
(iii) Determine, being careful to explain your reasons in each case:
(a) (1 mark) whether the Markov chain X is time-homogeneous
(b) (1 mark) whether it is irreducible
(c) (2 marks) whether it admits a stationary probability distribution
(iv) (1 mark) Starting from the state Xt = j, calculate the probability of suffering no
further accident for the next n successive periods.
(v) Suppose you are provided with full claims records for a number of a companys policy
holders.
(a) (2 marks) Describe a method for estimating the parameters and p
(b) (3 marks) Explain how to test the assumption that the probability of an accident
depends only on the cumulative number of accidents, Xn , and does not have a
direct dependence on n.
Question 2 (5 marks)
Policyholders of a certain insurance company have accidents at times distributed according
to a Poisson process with rate . The amount of time from when the accident occurs until
a claim is made has distribution G.
(i) (3 marks) Find the probability there are exactly n incurred but as yet unreported
claims at time t.
(ii) (2 marks) Suppose that each claim amount has distribution F , and that the claim
amount is independent of the time that it takes to report the claim. Find the expected
value of the sum of all incurred but as yet unreported claims at time t.
1
4
(ii) (a) (2 marks) Explain how the above can be used to simulate a path of the Poisson
process with intensity = 4.
(b) (2 marks) Derive a method for simulating a Poisson random variable with mean
4.
(iii) (2 marks) Describe an alternative method for generating a Poisson random variable
with mean 4 based on the cumulative distribution function.
(iv) (2 marks) State, giving reasons, which of the two methods in (ii) and (iii) would be
more efficient if a simulation calls for a large number of Poisson random variables with
mean 4.
PN M =
PM
(iv) (2 marks) Calculate the probability of never being widowed if currently in state N M .
(v) (2 marks) Suggest two ways in which the model could be made more realistic.
t y
+e
2y
y t
at
ea(st) dBs .
0
(ii) (3 marks) State the probability distribution of rt and its limit for large t.
(iii) (4 marks) Derive in the case s < t, the conditional expectation E[rt |Fs ], where
{Fs : s 0} is the filtration generated by the Brownian motion B.
i=1
i B i . Calculate i for i = 1, 2.