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Views on non-Normal markets [24]

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Bullet points include: Idea: two or more ‘regimes’ (each e.g. characterised by a complete N(µ,V) distribution, say R1 and R2. World is in one of these states at time t. Switches from Ri to Rj with probability pi,j at time t. Usually adopt a ‘simple’ Markov chain formulation, in which pi,j does not depend on what regimes the world was in before the last time period. Can be generalised to continuously varying distributions, and continuous time. If latter then typically solved using stochastic calculus. Although numerical solution then typically reintroduces time grid

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