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CT4 April 13' Q11ii

E

Edward Smith

Member
What does the questions mean by the nature of the boundaries? The answer suggests a 'mixed type', which implies the process operates in continuous time, which doesn't seem to make sense given that changes in level can only happen at the end of each year?
 
Hi

The types of boundaries first come up in section 5.4 of chapter 2. The options are
  • absorbing boundary - where the probability of leaving the state at the next step is 0
  • reflecting boundary - where the probability of leaving the state at the next step is 1
  • mixed boundary - anything in between
In this case we have mixed boundaries, since there is a non-zero probability of remaining in the boundary state and a non-zero probability of leaving the boundary state in the next step.

Hope that helps

DAve
 
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