A mixed integer linear program to compress transition probability matrices in Markov chain bootstrapping

Roy Cerqueti, Paolo Falbo (), Cristian Pelizzari (), Federica Ricca () and Andrea Scozzari ()
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Paolo Falbo: Università degli Studi di Brescia
Cristian Pelizzari: Università degli Studi di Brescia
Federica Ricca: Sapienza Università di Roma
Andrea Scozzari: Università degli Studi Niccolò Cusano - Telematica Roma

Annals of Operations Research, 2017, vol. 248, issue 1, No 7, 163-187

Abstract: Abstract Bootstrapping time series is one of the most acknowledged tools to study the statistical properties of an evolutive phenomenon. An important class of bootstrapping methods is based on the assumption that the sampled phenomenon evolves according to a Markov chain. This assumption does not apply when the process takes values in a continuous set, as it frequently happens with time series related to economic and financial phenomena. In this paper we apply the Markov chain theory for bootstrapping continuous-valued processes, starting from a suitable discretization of the support that provides the state space of a Markov chain of order $$k \ge 1$$ k ≥ 1 . Even for small k, the number of rows of the transition probability matrix is generally too large and, in many practical cases, it may incorporate much more information than it is really required to replicate the phenomenon satisfactorily. The paper aims to study the problem of compressing the transition probability matrix while preserving the “law” characterising the process that generates the observed time series, in order to obtain bootstrapped series that maintain the typical features of the observed time series. For this purpose, we formulate a partitioning problem of the set of rows of such a matrix and propose a mixed integer linear program specifically tailored for this particular problem. We also provide an empirical analysis by applying our model to the time series of Spanish and German electricity prices, and we show that, in these medium size real-life instances, bootstrapped time series reproduce the typical features of the ones under observation.

Keywords: Time series bootstrapping; Mixed integer linear programming; Markov chains; Transition probability matrix compression; Continuous-valued stochastic processes (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10479-016-2181-9

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