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The $W,Z$ scale functions kit for first passage problems of spectrally negative Levy processes, and applications to the optimization of dividends (1706.06841v2)

Published 21 Jun 2017 in math.PR

Abstract: First passage problems for spectrally negative L\'evy processes with possible absorbtion or/and reflection at boundaries have been widely applied in mathematical finance, risk, queueing, and inventory/storage theory. Historically, such problems were tackled by taking Laplace transform of the associated Kolmogorov integro-differential equations involving the generator operator. In the last years there appeared an alternative approach based on the solution of two fundamental "two-sided exit" problems from an interval (TSE). A spectrally one-sided process will exit smoothly on one side on an interval, and the solution is simply expressed in terms of a "scale function" $W$ (Bertoin 1997). The non-smooth two-sided exit (or ruin) problem suggests introducing a second scale function $Z$ (Avram, Kyprianou and Pistorius 2004). Since many other problems can be reduced to TSE, researchers produced in the last years a kit of formulas expressed in terms of the "$W,Z$ alphabet" for a great variety of first passage problems. We collect here our favorite recipes from this kit, including a recent one (94) which generalizes the classic De Finetti dividend problem. One interesting use of the kit is for recognizing relationships between apparently unrelated problems -- see Lemma 3. Last but not least, it turned out recently that once the classic $W,Z$ are replaced with appropriate generalizations, the classic formulas for (absorbed/ reflected) L\'evy processes continue to hold for: a) spectrally negative Markov additive processes (Ivanovs and Palmowski 2012), b) spectrally negative L\'evy processes with Poissonian Parisian absorbtion or/and reflection (Avram, Perez and Yamazaki 2017, Avram Zhou 2017), or with Omega killing (Li and Palmowski 2017).

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