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

DOI10.1017/JPR.2017.20MaRDI QIDQ4684875zbMATH OpenOpenAlexFDO

Authors David Landriault, Bin Li, Hongzhong Zhang

Publication date 26 September 2018

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

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)

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.

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Cited in

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• Fatou's lemma for weakly converging measures under the uniform integrability condition
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