DIFFUSION LIMITS FOR A MARKOV MODULATED BINOMIAL COUNTING PROCESS
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Publication:5111484
DOI10.1017/S0269964818000578zbMATH Open1434.60110arXiv1801.03682WikidataQ128496296 ScholiaQ128496296MaRDI QIDQ5111484FDOQ5111484
Publication date: 27 May 2020
Published in: Probability in the Engineering and Informational Sciences (Search for Journal in Brave)
Abstract: In this paper we study limit behavior for a Markov-modulated (MM) binomial counting process, also called a binomial counting process under regime switching. Such a process naturally appears in the context of credit risk when multiple obligors are present. Markov-modulation takes place when the failure/default rate of each individual obligor depends on an underlying Markov chain. The limit behavior under consideration occurs when the number of obligors increases unboundedly, and/or by accelerating the modulating Markov process, called rapid switching. We establish diffusion approximations, obtained by application of (semi)martingale central limit theorems. Depending on the specific circumstances, different approximations are found.
Full work available at URL: https://arxiv.org/abs/1801.03682
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