Optimal Prediction of the Last-Passage Time of a Transient Diffusion

Abstract

We identify the integrable stopping time ${\tau }_{\ast }$ with minimal $L^1$-distance to the last-passage time ${\gamma }_z$ to a given level $z>0$, for an arbitrary non-negative time-homogeneous transient diffusion $X$. We demonstrate that ${\tau }_{\ast }$ is in fact the first time that $X$ assumes a value outside a half-open interval $[0,r_{\ast })$. The upper boundary $r_{\ast }>z$ of this interval is characterised either as the solution for a one-dimensional optimisation problem, or as part of the solution for a free-boundary problem. A number of concrete examples illustrate the result.

arXiv comment17 pages, 5 figures