A hidden Markov process is one in which the chain of events is governed by unknown, underlying parameters or variables. One sees the results of the chain but not the “states” that help explain the progression of the chain. Those not acquainted with baseball might throw their hands up when receiving updates of the number of runs scored each inning—one run in this inning, six in another, with no obvious pattern or explanation. Some investors liken financial markets, speech recognition patterns, and other complex chains of events to hidden Markov models.
