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DIFFUSION LIMITS FOR A MARKOV MODULATED BINOMIAL COUNTING PROCESS
Published online by Cambridge University Press: 30 January 2019
Abstract
In this paper, we study limit behavior for a Markov-modulated 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.
MSC classification
- Type
- Research Article
- Information
- Probability in the Engineering and Informational Sciences , Volume 34 , Issue 2 , April 2020 , pp. 235 - 257
- Copyright
- Copyright © Cambridge University Press 2019