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Section: Scientific Foundations

Monte Carlo methods

Monte Carlo methods are numerical methods that are widely used in situations where (i) a stochastic (usually Markovian) model is given for some underlying process, and (ii) some quantity of interest should be evaluated, that can be expressed in terms of the expected value of a functional of the process trajectory, which includes as an important special case the probability that a given event has occurred. Numerous examples can be found, e.g. in financial engineering (pricing of options and derivative securities)  [48] , in performance evaluation of communication networks (probability of buffer overflow), in statistics of hidden Markov models (state estimation, evaluation of contrast and score functions), etc. Very often in practice, no analytical expression is available for the quantity of interest, but it is possible to simulate trajectories of the underlying process. The idea behind Monte Carlo methods is to generate independent trajectories of this process or of an alternate instrumental process, and to build an approximation (estimator) of the quantity of interest in terms of the weighted empirical probability distribution associated with the resulting independent sample. By the law of large numbers, the above estimator converges as the size N of the sample goes to infinity, with rate Im1 ${1/\sqrt N}$ and the asymptotic variance can be estimated using an appropriate central limit theorem. To reduce the variance of the estimator, many variance reduction techniques have been proposed. Still, running independent Monte Carlo simulations can lead to very poor results, because trajectories are generated blindly , and only afterwards are the corresponding weights evaluated. Some of the weights can happen to be negligible, in which case the corresponding trajectories are not going to contribute to the estimator, i.e. computing power has been wasted.

A recent and major breakthrough, a brief mathematical presentation of which is given in  3.2 , has been the introduction of interacting Monte Carlo methods, also known as sequential Monte Carlo (SMC) methods, in which a whole (possibly weighted) sample, called system of particles , is propagated in time, where the particles

In full generality, the underlying process is a discrete–time Markov chain, whose state space can be

finite, continuous, hybrid (continuous / discrete), graphical, constrained, time varying, pathwise, etc.,

the only condition being that it can easily be simulated . The very important case of a sampled continuous–time Markov process, e.g. the solution of a stochastic differential equation driven by a Wiener process or a more general Lévy process, is also covered.

In the special case of particle filtering, originally developed within the tracking community, the algorithms yield a numerical approximation of the optimal Bayesian filter, i.e. of the conditional probability distribution of the hidden state given the past observations, as a (possibly weighted) empirical probability distribution of the system of particles. In its simplest version, introduced in several different scientific communities under the name of bootstrap filter   [51] , Monte Carlo filter   [55] or condensation (conditional density propagation) algorithm  [53] , and which historically has been the first algorithm to include a redistribution step, the selection mechanism is governed by the likelihood function: at each time step, a particle is more likely to survive and to replicate at the next generation if it is consistent with the current observation. The algorithms also provide as a by–product a numerical approximation of the likelihood function, and of many other contrast functions for parameter estimation in hidden Markov models, such as the prediction error or the conditional least–squares criterion.

Particle methods are currently being used in many scientific and engineering areas

positioning, navigation, and tracking  [52] , [45] , visual tracking  [53] , mobile robotics  [46] , [72] , ubiquitous computing and ambient intelligence, sensor networks, risk evaluation and simulation of rare events  [49] , genetics, molecular simulation  [47] , etc.

Other examples of the many applications of particle filtering can be found in the contributed volume  [28] and in the special issue of IEEE Transactions on Signal Processing devoted to Monte Carlo Methods for Statistical Signal Processing in February 2002, where the tutorial paper  [29] can be found, and in the textbook  [68] devoted to applications in target tracking. Applications of sequential Monte Carlo methods to other areas, beyond signal and image processing, e.g. to genetics, can be found in  [66] .

Particle methods are very easy to implement, since it is sufficient in principle to simulate independent trajectories of the underlying process. The whole problematic is multidisciplinary, not only because of the already mentioned diversity of the scientific and engineering areas in which particle methods are used, but also because of the diversity of the scientific communities which have contributed to establish the foundations of the field

target tracking, interacting particle systems, empirical processes, genetic algorithms (GA), hidden Markov models and nonlinear filtering, Bayesian statistics, Markov chain Monte Carlo (MCMC) methods.


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