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

Abstract

First passage problems for spectrally negative Lévy 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) Lévy processes continue to hold for: a) spectrally negative Markov additive processes (Ivanovs and Palmowski 2012), b) spectrally negative Lévy 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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Cited by in corpus (7)

• Optimal periodic dividend strategies for spectrally negative Lévy processes with fixed transaction costs
• Moments of the ruin time in a Lévy risk model
• Boundary conditions for nonlocal one-sided pseudo-differential operators and the associated stochastic processes II
• Maximum Drawdown and Drawdown Duration of Spectrally Negative Levy Processes Decomposed at Extremes
• A Review of First-Passage Theory for the Segerdahl Risk Process and Extensions
• An optimal stopping problem for spectrally negative Markov additive processes
• Path Decomposition of Spectrally Negative Levy Processes