SAS for Finance

The need for the Markov model

Given the range of models we are discussing in this book, is there a need to discuss Markov models? When we speak about forecasting, one of the main inputs is the historical information. This could be in the form of a time series. However, Markov models don't need historical information to be able to forecast. When we build a Markov model, we are interested in the state (value/behavior/phenomenon) of a subject at the present time. We are also interested in the states that the subject can get transitioned to and the transition probabilities involved. A textbook definition of the Markov model would be a stochastic model describing a sequence of possible events in which the probability of each event depends only ...