The discrete-time random walk

is an example of a Markov process that can be described by an explicit transition equation, which is an example of the more general case

where a vector of state variables and a vector of shocks are considered. There is a strong connection between dynamic equations based on state variables and Markov processes. To be more precise, we should also require that the driving process consists of a sequence of i.i.d. variables.

Transcribed Image Text:

XkXk-1+ Ek, k = 1,2,3,..., =