Predicting the ultimate supremum of a stable Lévy process with no negative jumps

DOI10.1214/10-AOP598zbMATH Open1235.60036arXiv1004.2133MaRDI QIDQ653307FDOQ653307

Goran Peskir, Robert C. Dalang, Violetta Bernyk

Publication date: 9 January 2012

Published in: The Annals of Probability (Search for Journal in Brave)

Abstract: Given a stable L'{e}vy process $X=(X_t{)}_{0letleT}$ of index $alphain(1,2)$ with no negative jumps, and letting $S_t=su{p}_{0leslet}{X}_s$ denote its running supremum for $tin[0,T]$, we consider the optimal prediction problem [V=inf_{0le aule T}mathsf{E}(S_T-X_{ au})^p,] where the infimum is taken over all stopping times $au$ of $X$, and the error parameter $pin(1,alpha)$ is given and fixed. Reducing the optimal prediction problem to a fractional free-boundary problem of Riemann--Liouville type, and finding an explicit solution to the latter, we show that there exists $alph{a}_{*}in(1,2)$ (equal to 1.57 approximately) and a strictly increasing function $p_{*}:(alph{a}_{*},2)ightarrow(1,2)$ satisfying $p_{*}(alph{a}_{*}+)=1$, $p_{*}(2-)=2$ and $p_{*}(alpha)<alpha$ for $alphain(alph{a}_{*},2)$ such that for every $alphain(alph{a}_{*},2)$ and $pin(1,p_{*}(alpha))$ the following stopping time is optimal [ au_*=inf{tin[0,T]:S_t-X_tge z_*(T-t)^{1/alpha}},] where $z_{*}in(0,infty)$ is the unique root to a transcendental equation (with parameters $alpha$ and $p$). Moreover, if either $alphain(1,alph{a}_{*})$ or $pin(p_{*}(alpha),alpha)$ then it is not optimal to stop at $tin[0,T)$ when $S_t-X_t$ is sufficiently large. The existence of the breakdown points $alph{a}_{*}$ and $p_{*}(alpha)$ stands in sharp contrast with the Brownian motion case (formally corresponding to $alpha=2$), and the phenomenon itself may be attributed to the interplay between the jump structure (admitting a transition from lighter to heavier tails) and the individual preferences (represented by the error parameter $p$).

Full work available at URL: https://arxiv.org/abs/1004.2133

zbMATH Keywords

fractional derivativeoptimal stoppingoptimal predictioncurved boundaryweakly singular Volterra integral equationfractional free-boundary problempolar kernelstochastic process reflected at its supremumstable Lévy process with no negative jumps

Mathematics Subject Classification ID

Prediction theory (aspects of stochastic processes) (60G25) Fractional derivatives and integrals (26A33) Integro-ordinary differential equations (45J05) Integro-differential operators (47G20) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (17)

• Intertwining certain fractional derivatives
• Optimal detection of a hidden target: the median rule
• Predicting the last zero before an exponential time of a spectrally negative Lévy process
• Quickest detection of a hidden target and extremal surfaces
• Censored stable subordinators and fractional derivatives
• Spectral decomposition of fractional operators and a reflected stable semigroup
• Three-dimensional Brownian motion and the golden ratio rule
• Joint density of the stable process and its supremum: regularity and upper bounds
• Exact simulation of the extrema of stable processes
• Predicting the Supremum: Optimality of ‘Stop at Once or Not at All’
• Existence of density functions for the running maximum of a Lévy-Itô diffusion
• Predicting the time at which a Lévy process attains its ultimate supremum
• The law of the supremum of a stable Lévy process with no negative jumps
• Stochastic classical solutions for space-time fractional evolution equations on a bounded domain
• Geometrically Convergent Simulation of the Extrema of Lévy Processes
• Reflected spectrally negative stable processes and their governing equations
• Optimally Stopping at a Given Distance from the Ultimate Supremum of a Spectrally Negative Lévy Process

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