Statistics & Probability Letters 76 (2006) 128134

Prediction for some processes related to a fractional

Brownian motion
$
T.E. Duncan

Department of Mathematics, University of Kansas, Lawrence, KS 66045, USA

Received 14 July 2004; received in revised form 18 May 2005
Available online 3 August 2005
Abstract
In this paper, explicit expressions are given for some conditional expectations for the prediction of some
stochastic processes that are obtained from a fractional Brownian motion with the Hurst parameter in the
interval 0; 1. These processes are constructed as solutions of stochastic differential equations with a
fractional Brownian motion or as solutions of multiple stochastic integrals.
r 2005 Elsevier B.V. All rights reserved.
Keywords: Fractional Brownian motion; Prediction; Conditional expectation
1. Introduction
The explicit solution for the prediction of a process that is obtained from a fractional Brownian
motion can be very useful in various applications as well as for the theory of these stochastic
processes. Gripenberg and Norros (1996) and Pipiras and Taqqu (2001) have provided different
approaches to the explicit solution of the prediction of a fractional Brownian motion, that is, the
corresponding conditional expectation of a fractional Brownian motion. In this paper, this
explicit prediction solution is extended to some other processes associated with a fractional
Brownian motion. Specically, the processes that are considered are a Gaussian process that is the
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Research supported in part by NSF Grants DMS 0204669 and ANI 0125410.

Tel.: +1 785 864 3032; fax: +1 785 864 5255.

E-mail address: duncan@math.ukans.edu.
solution of a linear stochastic differential equation, a geometric fractional Brownian motion and
some processes obtained by stochastic integration. In general, solving a stochastic differential
equation requires a well-developed stochastic calculus. While such a stochastic calculus does not
exist for H small, nonetheless the stochastic differential equations considered here can be solved
for all H 2 0; 1. All of the results here can be viewed as some natural extensions of the result for
prediction of a fractional Brownian motion.
Let H 2 0; 1 be xed and let Bt; tX0 be a standard fractional Brownian motion, that is, a
Gaussian process with continuous sample paths such that EBt 0 and
EBsBt
1
2
s
2H
t
2H
js tj
2H
(1)
for all s; t 2 R

. Since H is xed the dependence of B on H is suppressed. Let O; F; P be a

complete probability space for Bt; tX0, where O CR

; R with the topology of uniform

convergence on compact subsets of R

, F is the P-completion of the associated Borel s-algebra

and P is the Gaussian measure. Let F
t
be the P-completion of sBs; s 2 0; t for t 2 R

. The
covariance function (1) can be computed by integration. Let T40 and s; t 2 0; T. The
covariance function (1) can be expressed in terms of fractional integrals as
EBs Bt rH
_
T
0
u
2
H1=2
rI
H1=2
T
u
H1=2
1
0;s
rI
H1=2
T
u
H1=2
1
0;t
r dr, (2)
where u
a
s s
a
for a 2 R,
I
a
T
f s
1
Ga
_
T
s
f rr s
a1
dr
for a40,
I
a
T
f s
1
G1 a
d
ds
_
T
s
f rr s
a
dr
for a 2 0; 1, and
rH
G
2
H
1
2
H2H 1
bH
1
2
; 2 2H
,
where G is the gamma function and b is the beta function. If H 2
1
2
; 1, then the covariance
function can be expressed more simply as
EBsBt
_
s
0
_
t
0
fu v du dv, (3)
where
fu H2H 1juj
2H2
. (4)
It follows from the usual isometry method for Wiener integrals that if f : 0; T !R is a function
or a distribution satisfying
jf j
2
H
rH
_
T
0
u
H1=2
sI
H1=2
T
u
H1=2
f s
2
dso1,
ARTICLE IN PRESS
T.E. Duncan / Statistics & Probability Letters 76 (2006) 128134 129
then
_
T
0
f dB is a zero mean Gaussian random variable with second moment jf j
2
H
. The family of
elements f satisfying jf j
2
H
o1 is a Hilbert space, denoted by L
2
H
, with the inner product denoted
h; i
H
. An element f 2 L
2
H
is a function if H 2 0;
1
2
but it may be a distribution if H 2
1
2
; 1.
2. Some prediction results
Initially, the problem of prediction of the solution of a linear stochastic differential equation
with a fractional Brownian motion is considered. The description of stochastic processes as
solutions of stochastic differential equations has been important historically both for the theory
and the applications of these processes. Let Xt; tX0 be the real-valued, Gaussian process that
is the solution of the stochastic differential equation
dXt atXt dt dBt,
X0 x
0
, 5
where x
0
2 R, a : R

!R is bounded and Borel measurable and Bt; tX0 is a standard

fractional Brownian motion with H 2 0; 1. It is elementary to verify that Xt is given by
Xt e
_
t
0
a
x
0

_
t
0
e
_
t
s
a
dBs, (6)
so it follows from (5) and (6) that
sXu; u 2 0; t sBu; u 2 0; t.
The following result is a simple extension of a prediction result for Bt that is given in
Gripenberg and Norros (1996) and Pipiras and Taqqu (2001).
Lemma 1. If 0osot and c : s; t !R is an element of L
2
H
, then
E
_
t
s
c dB j Br; r 2 0; s
_ _

_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2
c dB. (7)
Proof. Fix t40 and s 2 0; t. By a result in Gripenberg and Norros (1996) and Pipiras and Taqqu
(2001)
EBt j Br; r 2 0; s Bs
_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2
1
s;t
dB.
To verify (7), initially assume that c is a step function, that is,
cr

n1
i0
c
i
1
t
i
;t
i1

r, (8)
for r 2 s; t, where s t
0
ot
1
o ot
n
t. For c given by (8)
_
t
s
c dB

n1
i0
c
i
Bt
i1
Bt
i
.
ARTICLE IN PRESS
T.E. Duncan / Statistics & Probability Letters 76 (2006) 128134 130
By the linearity of conditional expectation
E
_
t
s
c dB j F
s
_ _

_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2

n1
i0
c
i
1
t
0
;t
i1

1
t
0
;t
i

_ _ _ _
dB

_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2

n1
i0
c
i
1
t
i
;t
i1

_ _ _ _
dB. 9
For an arbitrary c in L
2
H
there is a sequence of step functions that converge to c in L
2
H
. So equality
(7) follows by a simple passage to the limit from equality (9). &
It follows directly from (7) that
E
_
t
0
c dB j Br; r 2 0; s
_ _

_
s
0
c dB E
_
t
s
c dB j Br; r 2 0; s
_ _
,
where c : 0; t !R and c 2 L
2
H
. The variance of the error for the prediction of
_
t
0
c dB given
sBr; r 2 0; s is
_
t
s
u
H1=2
rI
H1=2
t
u
H1=2
c1
s;t
r
2
dr.
This error variance follows immediately from the fact that E
_
t
0
c dB
2
jcj
2
H
.
The preceding lemma provides a prediction result for the solution (6) of (5).
Proposition 1. Let Xt; tX0 be the process given by (6) that is the solution of (5) and let t40 and
s 2 0; t be xed. Then the following equality is satised:
EXt j Xr; r 2 0; s
EXt j F
s

e
_
t
s
a
Xs
_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2
v1
s;t
dB
e
_
t
s
a
Xs
_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2
v1
s;t
dX aX dr, 10
where u
a
r r
a
and vr e
_
t
r
a
.
Now consider the stochastic differential equation for a geometric fractional Brownian motion
with H 2 0; 1:
dXt Xtat dt bt dBt,
X0 x
0
, 11
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T.E. Duncan / Statistics & Probability Letters 76 (2006) 128134 131
where a : R

!R and b : R

!R are bounded, Borel measurable functions and x

0
40. A
solution of (11) is
Xt x
0
exp
_
t
0
a ds
_
t
0
b dB
1
2
jb1
0;t
j
2
H
_ _
. (12)
This solution can also be expressed using the Wick exponential, exp

(e.g., Duncan et al., 2000) as

Xt x
0
exp
_
t
0
a
_ _
exp

_
t
0
b dB
_ _
, (13)
where
exp

_
t
0
b dB
_ _
:

1
n0
1
n!
_
t
0
b dB
_ _
n
(14)
and
n
is the nth Wick product. It can be shown that solution (12) is the only solution by
extending the method in Hu and Zhou (to appear, Theorem 2.5) for H 2
1
2
; 1. It is a well-known
property of the Wick product on a Gaussian probability space that for integrable random
variables Y and Z,
EY Z EY EZ EYEZ. (15)
If G F is a s-algebra and W is an integrable random variable, then by the denition of the
conditional expectation there is the following equality:
E1
L
W E1
L
EW j G (16)
for each L 2 G, where EW j G is G-measurable. It follows directly from (15) and (16) that the
following equality is satised:
EY Z j G EY j G EZ j G, (17)
where G is a sub-s-algebra of F. It follows from (12) that
F
t
sXr; r 2 0; t for t40.
The following result provides an explicit prediction for solution (12) of (11).
Proposition 2. Let Xt; tX0 be the process given by (12) and let t40 and s 2 0; t be xed. Then
the following equality is satised
EXt j F
s
E Xs exp
_
t
s
a
_
t
s
b dB
1
2
hb1
s;t
; b1
s;t
i
H
_ _

F
s
_ _
Xs exp
_
t
s
a
_ _
exp

E
_
t
s
b dB j F
s
_ _ _ _
Xs exp
_
t
s
a
1
2
hb1
s;t
; b1
s;t
i
H
_

_
s
0
u
H1=2
I
H1=2
s
I
H1=2
t
u
H1=2
b1
s;t
dB
_
. 18
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T.E. Duncan / Statistics & Probability Letters 76 (2006) 128134 132
Proof. To verify (18), it sufces to use the denition of the Wick exponential (13), the convergence
of this innite series, and (7). &
Let L
2
H;n
:

n
j1
L
2
H
be the nth symmetric product of L
2
H
. This Hilbert space is the completion of
linear combinations of functions g
n
, where g 2 L
2
H
and f 2 L
2
H;n
0; T if
jf j
2
L
2
H;n

_
T
0

_
T
0
u
1=2H
s
1
u
1=2H
s
n
I
H1=2
T
I
H1=2
T
u
H1=2
r
1
u
H1=2
r
n
f r
1
; . . . ; r
n
s
1
; . . . ; s
n

2
ds
1
ds
n
o1. 19
The following result gives an explicit expression for the conditional expectation of a multiple
stochastic integral.
Proposition 3. Let n 2 N be xed and let Yt; tX0 be the process given by
Yt
_
t
0

_
t
0
f s
1
; . . . ; s
n
; t dBs
1
dBs
n
(20)
for tX0, where f ; t 2 L
2
H;n
. If t40 is xed and s 2 0; t then
EYt j F
s

_
s
0

_
s
0
u
H1=2
p
1
u
H1=2
p
n

I
H1=2
s
I
H1=2
s
I
H1=2
t
I
H1=2
t
u
H1=2
1
s;t
u
H1=2
1
s;t
f ; . . . ; ; tp
1
; . . . ; p
n
dBp
1
dBp
n
. 21
Proof. By the stochastic integration for fractional Brownian motion (e.g., Alos and Nualart,
2003; Duncan et al., 2000, preprint) it follows that Yt is a zero mean random variable with
EY
2
t jf j
2
L
2
H;n
and that the stochastic integral in (21) for EYt j F
s
is well dened.
Since t40 is xed, the dependence of f on t is suppressed. Initially, assume that there is a g 2 L
2
H
such that
f q
1
; . . . ; q
n
gq
1
gq
n
. (22)
Since the multiple stochastic integral (20) with f given by (22) can be expressed as a Wick product
of stochastic integrals, it follows that
Yt
_
t
0

_
t
0
gq
1
dBq
1
gq
n
dBq
n

_
t
0
gq
1
dBq
1

_
t
0
gq
n
dBq
n

_
t
0
g dB
_ _
n
.
Applying equality (17) for the Wick product and conditional expectation, it follows that
EYt j F
s
E
_
t
0
g dB j F
s
_ _
n
. (23)
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T.E. Duncan / Statistics & Probability Letters 76 (2006) 128134 133
Equality (23) veries (21) for an f given by (22). For an arbitrary f 2 L
2
H;n
there is a sequence
f
n
; n 2 N of functions, that are linear combinations of functions of form (22), that converges to f
in L
2
H;n
. &
The result for conditional expectation given in Proposition 3 can be immediately extended to
processes that are sums of multiple stochastic integrals of different orders by the linearity of the
conditional expectation. Thus, it is elementary to construct examples of stochastic processes
Yt; tX0 such that sYs; s 2 0; t F
t
so that EYt j F
s
is a prediction result.
Acknowledgements
The author thanks the referee for the suggestions for improvements of the paper, especially to
include the case of H in 0;
1
2
.
References
Alos, E., Nualart, D., 2003. Stochastic integration with respect to the fractional Brownian motion. Stoch. Stoch. Rep.
75, 129152.
Duncan, T.E., Hu, Y.Z., Pasik-Duncan, B., 2000. Stochastic calculus for fractional Brownian motion. I: theory. SIAM
J. Control Optim. 38, 582612.
Duncan, T.E., Jakubowski, J., Pasik-Duncan, B. Stochastic integration for fractional Brownian motion in a Hilbert
space. Preprint.
Gripenberg, G., Norros, I., 1996. On the prediction of fractional Brownian motion. J. Appl. Probab. 33, 400410.
Hu, Y., Zhou, X.Y. Stochastic control for linear systems driven by fractional noises. SIAM J. Control Optim., to
appear.
Pipiras, V., Taqqu, M.S., 2001. Are classes of deterministic integrals for fractional Brownian motion on an interval
complete? Bernoulli 7, 878897.
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