Refracted Levy processes

Abstract

Motivated by classical considerations from risk theory, we investigate boundary crossing problems for refracted Lévy processes. The latter is a Lévy process whose dynamics change by subtracting off a fixed linear drift (of suitable size) whenever the aggregate process is above a pre-specified level. More formally, whenever it exists, a refracted Lévy process is described by the unique strong solution to the stochastic differential equation \[ \D U_t = - δ\mathbf{1}_{\{U_t >b\}}\D t + \D X_t \] where $X=\{X_t:t\ge 0\}$ is a Lévy process with law $\mathbb{P}$ and $b,\delta \in \mathbb{R}$ such that the resulting process $U$ may visit the half line $(b,\infty )$ with positive probability. We consider in particular the case that $X$ is spectrally negative and establish a suite of identities for the case of one and two sided exit problems. All identities can be written in terms of the $q$-scale function of the driving Lévy process and its perturbed version describing motion above the level $b$. We remark on a number of applications of the obtained identities to (controlled) insurance risk processes.

References in corpus (2)

• Special, conjugate and complete scale functions for spectrally negative Lévy processes
• Convexity and smoothness of scale functions and de Finetti's control problem