Bayesian sequential testing of the drift of a Brownian motion

DOI10.1051/PS/2015012MaRDI QIDQ2786497zbMATH OpenOpenAlexFDO

Authors Erik Ekström, Juozas Vaicenavicius

Publication date 12 February 2016

Published in European Series in Applied and Industrial Mathematics (ESAIM): Probability and Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1509.00675

zbMATH Keywords

arithmetic Brownian motionBayesian analysisoptimal stoppingsequential hypothesis testing

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Diffusion processes (60J60) Bayesian problems; characterization of Bayes procedures (62C10) Sequential statistical analysis (62L10)

Abstract: We study a classical Bayesian statistics problem of sequentially testing the sign of the drift of an arithmetic Brownian motion with the $0$-$1$ loss function and a constant cost of observation per unit of time for general prior distributions. The statistical problem is reformulated as an optimal stopping problem with the current conditional probability that the drift is non-negative as the underlying process. The volatility of this conditional probability process is shown to be non-increasing in time, which enables us to prove monotonicity and continuity of the optimal stopping boundaries as well as to characterize them completely in the finite-horizon case as the unique continuous solution to a pair of integral equations. In the infinite-horizon case, the boundaries are shown to solve another pair of integral equations and a convergent approximation scheme for the boundaries is provided. Also, we describe the dependence between the prior distribution and the long-term asymptotic behaviour of the boundaries.

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