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Tail Behavior Of Stopped Lévy Processes With Markov Modulation

Author

Listed:
  • Beare, Brendan K.
  • Seo, Won-Ki
  • Toda, Alexis Akira

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.

Suggested Citation

  • Beare, Brendan K. & Seo, Won-Ki & Toda, Alexis Akira, 2022. "Tail Behavior Of Stopped Lévy Processes With Markov Modulation," Econometric Theory, Cambridge University Press, vol. 38(5), pages 986-1013, October.
    • Handle: RePEc:cup:etheor:v:38:y:2022:i:5:p:986-1013_7
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