Chapter 5: Probability and Statistics
Introduction
In this chapter we provide an overview of probability and statistics and discuss their use in algorithmic trading applications. The chapter begins with an overview of the mathematics required for probability and statistics modeling and continues with a review of essential probability distribution functions required for model construction and parameter estimation.
Random Variables
A random variable is defined as a variable that can take on different values. These values are determined from its underlying probability distribution, and the actual distribution is characterized by a mean and standard deviation term (such as a normal distribution) and a skewness and kurtosis measure. The ...
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