Increasing Domain Infill Asymptotics for Stochastic Differential Equations Driven by Fractional Brownian Motion

TL;DR

This paper develops asymptotic inference methods for fractional Brownian motion driven SDEs, establishing estimator properties and demonstrating the advantages of Bayesian approaches over classical methods in both simulated and real data.

Contribution

It introduces increasing domain infill asymptotic theory for fractional SDEs, providing consistency and normality results for estimators where traditional likelihood approaches fail.

Findings

Bayesian fractional SDEs outperform classical methods in simulations and real data.

Maximum likelihood estimators are consistent and asymptotically normal for certain parameters.

Classical asymptotic normality for the Hurst parameter could not be established.

Abstract

Although statistical inference in stochastic differential equations (SDEs) driven by Wiener process has received significant attention in the literature, inference in those driven by fractional Brownian motion seem to have seen much less development in comparison, despite their importance in modeling long range dependence. In this article, we consider both classical and Bayesian inference in such fractional Brownian motion based SDEs. In particular, we consider asymptotic inference for two parameters in this regard; a multiplicative parameter associated with the drift function, and the so-called "Hurst parameter" of the fractional Brownian motion, when the time domain tends to infinity. For unknown Hurst parameter, the likelihood does not lend itself amenable to the popular Girsanov form, rendering usual asymptotic development difficult. As such, we develop increasing domain infill asymptotic theory, by discretizing the SDE. In this setup, we establish consistency and asymptotic normality of the maximum likelihood estimators, as well as consistency and asymptotic normality of the Bayesian posterior distributions. However, classical or Bayesian asymptotic normality with respect to the Hurst parameter could not be established. We supplement our theoretical investigations with simulation studies in a non-asymptotic setup, prescribing suitable methodologies for classical and Bayesian analyses of SDEs driven by fractional Brownian motion. Applications to a real, close price data, along with comparison with standard SDE driven by Wiener process, is also considered. As expected, it turned out that our Bayesian fractional SDE triumphed over the other model and methods, in both simulated and real data applications.