Someone asked me recently, what is a risk-measure which is not law-invariant? Admittedly, the law invariance property seems so natural that any meaningful risk measure should have this property. Of course we can struggle to construct risk measures which are not law invariant, but are there any naturally occurring risk measures which do not have this property? The answer is yes, but let us take things from the start. Continue reading →
Let be a filtered probability space with a discrete filtration (although the results we are going to discuss hold for continuous random processes as well). We say that a random process on possesses the Markov property if
for all . We see this often in the following form
or simply with with . This is the Markov property.
The following is just wrong: For a sequence of sets where
A very easy and straightforward way to verify that this is false is to set , that is, provide no information about and provide the information , i.e., which actually offers some information. Then, according to the wrong statement above, it would be
Although, it should naturally be . That is, the information that is completely expunged.
Reference: K.L. Chung, Green, Brown and Probability, World Scientific, 1995 [Chap. 5].
What does it mean for a random variable to exhibit zero risk? It of course depends on the risk measure we are using to quantify it. Continue reading →