Markov-modulated Ornstein-Uhlenbeck processes

Abstract

In this paper we consider an Ornstein-Uhlenbeck (OU) process $(M(t){)}_{t⩾0}$ whose parameters are determined by an external Markov process $(X(t){)}_{t⩾0}$ on a finite state space $\{1,\dots ,d\}$; this process is usually referred to as Markov-modulated Ornstein-Uhlenbeck (MMOU). We use stochastic integration theory to determine explicit expressions for the mean and variance of $M(t)$. Then we establish a system of partial differential equations (PDEs) for the Laplace transform of $M(t)$ and the state $X(t)$ of the background process, jointly for time epochs $t=t_1,\dots ,t_K.$ Then we use this PDE to set up a recursion that yields all moments of $M(t)$ and its stationary counterpart; we also find an expression for the covariance between $M(t)$ and $M(t+u)$. We then establish a functional central limit theorem for $M(t)$ for the situation that certain parameters of the underlying OU processes are scaled, in combination with the modulating Markov process being accelerated; interestingly, specific scalings lead to drastically different limiting processes. We conclude the paper by considering the situation of a single Markov process modulating multiple OU processes.

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• Markov-modulated Ornstein-Uhlenbeck processes

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