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\(s\)-stable laws in insurance and finance and generalization to nilpotent Lie groups
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    \(s\)-stable laws in insurance and finance and generalization to nilpotent Lie groups (English)
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    22 September 2002
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    The paper is devoted to some applications of \(s\)-stable motions. The concept of \(s\)-stability was introduced in previous papers of the first author. This concept is explained briefly in the introduction. In the first part of the paper the authors show that certain \(s\)-stable motions can be interpreted as the limits of total amount of claims processes (up to deterministic reserve) of a portfolio of so called excess-of-loss reinsurance contracts, which are assumed to be nontraded assets. This means that for every individual claim, the amount which exceeds some fixed bound \(r\) is reinsured. The authors' approach leads to Erlang's model known from operation research. They also give the explicit formulas for the price of perpetual American options in the case when the logarithm of the price of the underlying asset is an \(s\)-stable motion and if the pricing is with respect to the so-called Esscher transform which is equivalent to a power utility function of a representative investor. In the second part of the paper the concept of \(s\)-stability is generalized to simply connected nilpotent Lie groups. The Levy measure and the \(s\)-domain of attraction of nongaussian \(s\)-stable convolution semigroups are characterized for step \(2\)-nilpotent Lie groups.
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    stable laws
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    reinsurance contracts
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    Levy measure
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    nilpotent Lie groups
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