TAIL BEHAVIOR OF STOPPED LÉVY PROCESSES WITH MARKOV MODULATION

Brendan Beare, Won-Ki Seo and Alexis Akira Toda

Econometric Theory, 2022, vol. 38, issue 5, 986-1013

Abstract: This article concerns the tail probabilities of a light-tailed Markov-modulated Lévy process stopped at a state-dependent Poisson rate. The tails are shown to decay exponentially at rates given by the unique positive and negative roots of the spectral abscissa of a certain matrix-valued function. We illustrate the use of our results with an application to the stationary distribution of wealth in a simple economic model in which agents with constant absolute risk aversion are subject to random mortality and income fluctuation.

Date: 2022
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Working Paper: Tail behavior of stopped L\'evy processes with Markov modulation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:etheor:v:38:y:2022:i:5:p:986-1013_7

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