Occupation Times of General Lévy Processes

For an arbitrary Lévy process X which is not a compound Poisson process, we are interested in its occupation times. We use a quite novel and useful approach to derive formulas for the Laplace transform of the joint distribution of X and its occupation times. Our formulas are compact, and more importantly, the forms of the formulas clearly demonstrate the essential quantities for the calculation of occupation times of X. It is believed that our results are important not only for the study of stochastic processes, but also for financial applications.     

Occupation Times of Refracted Lévy Processes

A refracted Lévy process 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 precisely, whenever it exists, a refracted Lévy process is described by the unique strong solution to the stochastic differential equation $$\begin{aligned} {\mathrm{d}}U_t=-\delta \mathbf 1 _{\{U_t>b\}}{\mathrm{d}}t +{\mathrm{d}}X_t,\quad t\ge 0 \end{aligned}$$ 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. In this paper, we consider the case that \(X\) is spectrally negative and establish a number of identities for the following functionals $$\begin{aligned} \int \limits _0^\infty \mathbf 1 _{\{U_t where \(\kappa ^+_c=\inf \{t\ge 0: U_t> c\}\) and \(\kappa ^-_a=\inf \{t\ge 0: U_t< a\}\) for \(a . Our identities extend recent results of Landriault et al. (Stoch Process Appl 121:2629–2641, 2011) and bear relevance to Parisian-type financial instruments and insurance scenarios.     

A Smooth Approach to Malliavin Calculus for Lévy Processes

An approach to Malliavin calculus for Lévy processes, discrete in time and smooth in chance, is presented. Each Lévy triple can be satisfied by a Lévy process living on a fixed sample space Ω, which is, in a certain sense, a finite dimensional Euclidean space. The probability measures on Ω characterize the Lévy processes. We compare these measures with the associated Lévy measures, and present several examples. Using chaos expansions for Lévy functionals, even for those having no moments, we can represent all these functionals by polynomials in several variables. There exists an effective method to compute the kernels of the chaos decomposition. Finally, we point out several applications, which are postponed to a succession of papers. Dedicated to Helmut Schwichtenberg.     

Hitting Times of Points and Intervals for Symmetric Lévy Processes

For one-dimensional symmetric Lévy processes, which hit every point with positive probability, we give sharp bounds for the tail function P ^x (T _B >t), where T _B is the first hitting time of B which is either a single point or an interval. The estimates are obtained under some weak type scaling assumptions on the characteristic exponent of the process. We apply these results to prove sharp two-sided estimates of the transition density of the process killed after hitting B.     

A Lévy input fluid queue with input and workload regulation

We consider a controlled queuing model with Lévy input. The controls take place at random times. They involve the current workload and the input processes and may also depend on whether the workload process has reached certain critical values since the last control epoch. We propose a solution strategy for deriving the steady-state distribution of this model which is based on recent advances in the fluctuation theory of spectrally one-sided Lévy process. We provide illustrative examples involving a clearing model, an inventory model, and a model for the TCP protocol.     

Large Deviations of Local Times of Lévy Processes

For X(t) a real-valued symmetric Lévy process, its characteristic function is E(e ^iX(t))=exp(–t()). Assume that is regularly varying at infinity with index 1<2. Let L ^x _t denote the local time of X(t) and L* _t =sup _xR L ^x _t . Estimates are obtained for P(L ⁰ _t y) and P(L* _t y) as y and t fixed.     

Tightness and Convergence of Trimmed Lévy Processes to Normality at Small Times

For nonnegative integers r, s, let \(^{(r,s)}X_t\) be the Lévy process \(X_t\) with the r largest positive jumps and the s smallest negative jumps up till time t deleted, and let \(^{(r)}\widetilde{X}_t\) be \(X_t\) with the r largest jumps in modulus up till time t deleted. Let \(a_t \in \mathbb {R}\) and \(b_t>0\) be non-stochastic functions in t. We show that the tightness of \(({}^{(r,s)}X_t - a_t)/b_t\) or \(({}^{(r)}{\widetilde{X}}_t - a_t)/b_t\) as \(t\downarrow 0\) implies the tightness of all normed ordered jumps, and hence the tightness of the untrimmed process \((X_t -a_t)/b_t\) at 0. We use this to deduce that the trimmed process \(({}^{(r,s)}X_t - a_t)/b_t\) or \(({}^{(r)}{\widetilde{X}}_t - a_t)/b_t\) converges to N(0, 1) or to a degenerate distribution as \(t\downarrow 0\) if and only if \((X_t-a_t)/b_t \) converges to N(0, 1) or to the same degenerate distribution, as \(t \downarrow 0\).     

Numerical Computation of First-Passage Times of Increasing Lévy Processes

Let {D(s), s ≥ 0} be a non-decreasing Lévy process. The first-hitting time process {E(t), t ≥ 0} (which is sometimes referred to as an inverse subordinator) defined by $E(t) = inf {s: D(s) > t }$E(t) = inf {s: D(s) > t } is a process which has arisen in many applications. Of particular interest is the mean first-hitting time U(t)=mathbbEE(t)U(t)=mathbb{E}E(t). This function characterizes all finite-dimensional distributions of the process E. The function U can be calculated by inverting the Laplace transform of the function [(U)tilde](l) = (lf(l))^-1widetilde{U}(lambda) = (lambda phi(lambda))^{-1}, where ϕ is the Lévy exponent of the subordinator D. In this paper, we give two methods for computing numerically the inverse of this Laplace transform. The first is based on the Bromwich integral and the second is based on the Post-Widder inversion formula. The software written to support this work is available from the authors and we illustrate its use at the end of the paper.     

General Draw-Down Times for Refracted Spectrally Negative Lévy Processes

Methodology and Computing in Applied Probability - In this paper, we prove several results involving a general draw-down time from the running maximum for refracted spectrally negative Lévy...     

Occupation Times of Intervals Until Last Passage Times for Spectrally Negative Lévy Processes

In this paper, we derive the Laplace transform of occupation times of intervals until last passage times for spectrally negative Lévy processes. Motivated by [2], the last passage times before an independent exponential variable are investigated. By a dual argument, explicit formulas are obtained and expressed as a modified version of the analytical identities introduced in Loeffen et al. [13]. As an application, a corridor option and an Omega risk model are studied here.     

Multiple integration with respect to Poisson and Lévy processes

Summary Necessary and sufficient conditions are given for the existence of a multiple stochastic integral of the form ...fdX ₁...dX_d, where X ₁, ..., X _d are components of a positive or symmetric pure jump type Lévy process in _d. Conditions are also given for a sequence of integrals of this type to converge in probability to zero or infinity, or to be tight. All arguments proceed via reduction to the special case of Poisson integrals.Dedicated to Klaus Krickeberg on the occasion of his 60th birthdaySupported by NSF grant DMS-8703804Supported by NSF grant DMS-8713103     

Regularity of Local Times Associated with Volterra–Lévy Processes and Path-Wise Regularization of Stochastic Differential Equations

Journal of Theoretical Probability - We investigate the space-time regularity of the local time associated with Volterra–Lévy processes, including Volterra processes driven by $$\alpha...     

Lévy processes and quasi-shuffle algebras

We investigate the algebra of repeated integrals of semimartingales. We prove that a minimal family of semimartingales generates a quasi-shuffle algebra. In essence, to fulfil the minimality criterion, first, the family must be a minimal generator of the algebra of repeated integrals generated by its elements and by quadratic covariation processes recursively constructed from the elements of the family. Second, recursively constructed quadratic covariation processes may lie in the linear span of previously constructed quadratic covariation processes and of the family, but may not lie in the linear span of repeated integrals of these. We prove that a finite family of independent Lévy processes that have finite moments generates a minimal family. Key to the proof are the Teugels martingales and a strong orthogonalization of them. We conclude that a finite family of independent Lévy processes forms a quasi-shuffle algebra. We discuss important potential applications to constructing efficient numerical methods for the strong approximation of stochastic differential equations driven by Lévy processes.     

Hybrid Lévy Models: Design and Computational Aspects

ABSTRACT

A hybrid model is a model, where two markets are studied jointly such that stochastic dependence can be taken into account. Such a dependence is well known for equity and interest rate markets on which we focus here. Other pairs can be considered in a similar way. Two different versions of a hybrid approach are developed. Independent time-inhomogeneous Lévy processes are used as the drivers of the dynamics of interest rates and equity. In both versions, the dynamics of the interest rate side is described by an equation for the instantaneous forward rate. Dependence between the markets is generated by introducing the driver of the interest rate market as an additional term into the dynamics of equity in the first version. The second version starts with the equity dynamics and uses a corresponding construction for the interest rate side. Dependence can be quantified in both cases by a single parameter. Numerically efficient valuation formulas for interest rate and equity derivatives are developed. Using market quotes for liquidly traded assets we show that the hybrid approach can be successfully calibrated.