The Annals of Probability

On the expected diameter of an L2-bounded martingale

Lester E. Dubins, David Gilat, and Isaac Meilijson

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Abstract

It is shown that the ratio between the expected diameter of an L2-bounded martingale and the standard deviation of its last term cannot exceed $\sqrt{3}$. Moreover, a one-parameter family of stopping times on standard Brownian motion is exhibited, for which the $\sqrt{3}$ upper bound is attained. These stopping times, one for each cost-rate c, are optimal when the payoff for stopping at time t is the diameter D(t) obtained up to time t minus the hitherto accumulated cost ct. A quantity related to diameter, maximal drawdown (or rise), is introduced and its expectation is shown to be bounded by $\sqrt{2}$ times the standard deviation of the last term of the martingale. These results complement the Dubins and Schwarz respective bounds 1 and $\sqrt{2}$ for the ratios between the expected maximum and maximal absolute value of the martingale and the standard deviation of its last term. Dynamic programming (gambling theory) methods are used for the proof of optimality.

Article information

Source
Ann. Probab., Volume 37, Number 1 (2009), 393-402.

Dates
First available in Project Euclid: 17 February 2009

Permanent link to this document
https://projecteuclid.org/euclid.aop/1234881694

Digital Object Identifier
doi:10.1214/08-AOP406

Mathematical Reviews number (MathSciNet)
MR2489169

Zentralblatt MATH identifier
1159.60020

Subjects
Primary: 60G44: Martingales with continuous parameter
Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory [See also 62L15, 91A60]

Keywords
Brownian motion gambling theory martingale optimal stopping

Citation

E. Dubins, Lester; Gilat, David; Meilijson, Isaac. On the expected diameter of an L 2 -bounded martingale. Ann. Probab. 37 (2009), no. 1, 393--402. doi:10.1214/08-AOP406. https://projecteuclid.org/euclid.aop/1234881694


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