Levy Risk Model with Two-Sided Jumps and a Barrier Dividend Strategy
28 Pages Posted: 11 Sep 2011 Last revised: 4 Feb 2014
Date Written: August 9, 2011
In this paper, we consider a general Levy risk model with two-sided jumps and a constant dividend barrier. We connect the ruin problem of the ex-dividend risk process with the first passage problem of the Levy process reflected at its running maximum. We prove that if the positive jumps of the risk model form a compound Poisson process and the remaining part is a spectrally negative Levy process with unbounded variation, the Laplace transform (as a function of the initial surplus) of the upward entrance time of the reflected (at the running infimum) Levy process exhibits the smooth pasting property at the reflecting barrier. When the surplus process is described by a double exponential jump diffusion in the absence of dividend payment, we derive some explicit expressions for the Laplace transform of the ruin time, the distribution of the deficit at ruin, and the total expected discounted dividends. Numerical experiments concerning the optimal barrier strategy are performed and new empirical findings are presented.
Keywords: Risk model, Barrier strategy, Levy process, Two-sided jump, Time of ruin, Deficit, Expected discounted dividend, Optimal dividend barrier, Integro-differential operator, Double exponential distribution, Reflected jump-diffusions, Laplace transform
JEL Classification: G22, G33
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
A Jump Diffusion Model for Option Pricing
By Steven Kou
Option Pricing Under a Double Exponential Jump Diffusion Model
By Steven Kou and Hui Wang
A Simple Option Formula for General Jump-Diffusion and Other Exponential Levy Processes