A Bayesian sequential test for the drift of a fractional Brownian motion

Abstract

AbstractWe consider a fractional Brownian motion with linear drift such that its unknown drift coefficient has a prior normal distribution and construct a sequential test for the hypothesis that the drift is positive versus the alternative that it is negative. We show that the problem of constructing the test reduces to an optimal stopping problem for a standard Brownian motion obtained by a transformation of the fractional Brownian motion. The solution is described as the first exit time from some set, and it is shown that its boundaries satisfy a certain integral equation, which is solved numerically.