Markov chains are used not because markets are memoryless, but because they capture persistence, regime behaviour, and long-run risk with minimal assumptions. They sit between pure randomness and full determinism, offering a balance of being simple enough to analyse yet rich enough to matter.
Conditions: Used as a modelling framework rather than as an exact description of markets.; The goal is parsimonious representation of persistence and regime changes.
Markov chains are used not because markets are memoryless, but because they capture persistence, regime behaviour, and long-run risk with minimal assumptions. They sit between pure randomness and full determinism, offering a balance of being simple enough to analyse yet rich enough to matter.
Conditions: Used as a modelling framework rather than as an exact description of markets.; The goal is parsimonious representation of persistence and regime changes.