First passage times of a jump diffusion process

DOI10.1239/AAP/1051201658MaRDI QIDQ4449508zbMATH OpenOpenAlexFDO

Authors S. G. Kou, Hui Wang

Publication date 11 February 2004

Published in Advances in Applied Probability (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1239/aap/1051201658

zbMATH Keywords

double exponential distributionfirst passage timeGaver-Stehfest algorithmindependent incrementsjump diffusion processLaplace transformLévy processPoisson processrenewal theoryrunning maxima

Mathematics Subject Classification ID

Laplace transform (44A10) Processes with independent increments; Lévy processes (60G51) Continuous-time Markov processes on discrete state spaces (60J27)

Review text

The jump diffusion process \[ X_t=\sigma W_t+\mu t+\sum_{i=1}^{N_t} Y_i, \quad X_0=0, \] is considered where \(W\) is a standard Brownian motion, \(N\) is a Poisson process with rate \(\lambda\), \(\sigma\) and \(\mu\) are positive constants. The i.i.d. r.v.s \((Y_i)_{i\geq 1}\) have a double exponential distribution given by the density \[ f_Y(y)=p\cdot\eta_1 e^{-\eta_1 y}\mathbf{1}_{\{y\geq 0\}}+ q\cdot\eta_2 e^{-| \eta_2| y}\mathbf{1}_{\{y< 0\}}, \] \(p,q\geq 0\), \(p+q=1\), \(\eta_1,\eta_2>0\). The authors derive the closed-form formulae for the Laplace transform of the first passage time \(\tau_b=\inf\{t\geq 0: X_t\geq b\}\), \(b>0\), as well as for \(\mathbf{E}[e^{-\alpha \tau_b}\mathbf{1}_{\{X_{\tau_b}-b>y\}}]\) and \(\mathbf{E}[e^{-\alpha \tau_b}\mathbf{1}_{\{X_{\tau_b}-b=y\}}]\), \(y\geq 0\). Connections with renewal-type equations are discussed. The Laplace transform of the joint law of \(X_t\) and \(\max_{0\leq s\leq t}X_s\) is obtained in terms of special functions. The Gaver-Stehfest algorithm for the numerical inversion of Laplace transforms is tested.

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