Home » Eng Finance » S » Stochastic

Stochastic

Probabilistic or random. A variable is called a ‘stochastic variable’ if it is capable of taking one of a number of alternative values each with a stated probability. For example, if you bet no that a coin will land heads then your income from the gamble is a stochastic variable: + no or -no each with probability one-half. Likewise a ‘stochastic process’ is a time-path of some variable, each step in which depends upon chance. For example, if you stand at a telegraph post, toss a coin to decide whether to take two steps forward or one step back, move, toss the coin again, and repeat after each move, then your progress (or lack of it) from the post is determined by a stochastic process.

Reference: The Penguin Dictionary of Economics, 3rd edt.