Predicting the Last Zero of a Spectrally Negative Lévy Process

Abstract

Last passage times arise in a number of areas of applied probability, including risk theory and degradation models. Such times are obviously not stopping times since they depend on the whole path of the underlying process. We consider the problem of finding a stopping time that minimises the L1-distance to the last time a spectrally negative Lévy process X is below zero. Examples of related problems in a finite horizon setting for processes with continuous paths are by Du Toit et al. (Stochastics Int J Probab Stochastics Process 80(2–3):229–245, 2008) and Glover and Hulley (SIAM J Control Optim 52(6):3833–3853, 2014), where the last zero is predicted for a Brownian motion with drift, and for a transient diffusion, respectively. As we consider the infinite horizon setting, the problem is interesting only when the Lévy process drifts to ∞ which we will assume throughout. Existing results allow us to rewrite the problem as a classic optimal stopping problem, i.e. with an adapted payoff process. We use a direct method to show that an optimal stopping time is given by the first passage time above a level defined in terms of the median of the convolution with itself of the distribution function of −inft≥0Xt. We also characterise when continuous and/or smooth fit holds