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Solving Optimal Dividend Problems via Phase-type Fitting Approximation of Scale Functions

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  • Masahiko Egami
  • Kazutoshi Yamazaki

Abstract

The optimal dividend problem by De Finetti (1957) has been recently generalized to the spectrally negative L\'evy model where the implementation of optimal strategies draws upon the computation of scale functions and their derivatives. This paper proposes a phase-type fitting approximation of the optimal strategy. We consider spectrally negative L\'evy processes with phase-type jumps as well as meromorphic L\'evy processes (Kuznetsov et al., 2010a), and use their scale functions to approximate the scale function for a general spectrally negative L\'evy process. We obtain analytically the convergence results and illustrate numerically the effectiveness of the approximation methods using examples with the spectrally negative L\'evy process with i.i.d. Weibull-distributed jumps, the \beta-family and CGMY process.

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  • Masahiko Egami & Kazutoshi Yamazaki, 2010. "Solving Optimal Dividend Problems via Phase-type Fitting Approximation of Scale Functions," Papers 1011.4732, arXiv.org.
    • Handle: RePEc:arx:papers:1011.4732
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    File URL: http://arxiv.org/pdf/1011.4732
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    Cited by:

    1. Tim Siu-Tang Leung & Kazutoshi Yamazaki, 2010. "American Step-Up and Step-Down Default Swaps under Levy Models," Papers 1012.3234, arXiv.org, revised Sep 2012.

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