A unified approach for drawdown (drawup) of time-homogeneous Markov processes

DOI10.1017/JPR.2017.20zbMATH Open1400.60044arXiv1702.07786OpenAlexW3103450760MaRDI QIDQ4684875FDOQ4684875

Hongzhong Zhang, David Landriault, Bin Li

Publication date: 26 September 2018

Published in: Journal of Applied Probability (Search for Journal in Brave)

Abstract: Drawdown (resp. drawup) of a stochastic process, also referred as the reflected process at its supremum (resp. infimum), has wide applications in many areas including financial risk management, actuarial mathematics and statistics. In this paper, for general time-homogeneous Markov processes, we study the joint law of the first passage time of the drawdown (resp. drawup) process, its overshoot, and the maximum of the underlying process at this first passage time. By using short-time pathwise analysis, under some mild regularity conditions, the joint law of the three drawdown quantities is shown to be the unique solution to an integral equation which is expressed in terms of fundamental two-sided exit quantities of the underlying process. Explicit forms for this joint law are found when the Markov process has only one-sided jumps or is a L'{e}vy process (possibly with two-sided jumps). The proposed methodology provides a unified approach to study various drawdown quantities for the general class of time-homogeneous Markov processes.

Full work available at URL: https://arxiv.org/abs/1702.07786

zbMATH Keywords

integral equationreflected processdrawdowntime-homogeneous Markov process

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) General theory of stochastic processes (60G07)

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