Refracted Lévy 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 dUt =-δ1{Ut>b} dt + dXt, where X = {Xtt > 0} is a Lévy process with law Pand b, δ ∈ R such that the resulting process U may visit the half line (b,∞) 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. © Association des Publications de l'Institut Henri Poincaré, 2010.