Bayesian sequential least-squares estimation for the drift of a Wiener process

Erik Ekström, Ioannis Karatzas and Juozas Vaicenavicius

Stochastic Processes and their Applications, 2022, vol. 145, issue C, 335-352

Abstract: Given a Wiener process with unknown and unobservable drift, we try to estimate this drift as effectively but also as quickly as possible, in the presence of a quadratic penalty for the estimation error and of a fixed, positive cost per unit of observation time. In a Bayesian framework, where the unobservable drift is assumed to have a known “prior” distribution, this question reduces to choosing judiciously a stopping time for an appropriate diffusion process in natural scale. We establish structural properties of the solution for the corresponding problem of optimal stopping. In particular, we show that, regardless of the prior distribution, the continuation region is monotonically shrinking in time. Moreover, we provide conditions on the prior distribution that guarantee a one-sided stopping region. Lastly, some concrete prior distributions are studied to illustrate the theoretical results.

Keywords: Sequential estimation; Sequential analysis; Optimal stopping (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.spa.2019.09.006

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