On scale functions for L\'evy processes with negative phase-type jumps

TL;DR

This paper introduces a new explicit expression for the scale function of Lévy processes with negative phase-type jumps, along with an efficient iterative algorithm for its computation, enabling handling of complex phase-type distributions.

Contribution

It provides a novel explicit formula for the scale function and an exponentially convergent iterative scheme for its calculation in Lévy processes with negative phase-type jumps.

Findings

The new formula simplifies the computation of scale functions.

The iterative scheme converges exponentially fast.

Numerical examples demonstrate the method's efficiency with many phases.

Abstract

We provide a novel expression of the scale function for a L\'evy processes with negative phase-type jumps. It is in terms of a certain transition rate matrix which is explicit up to a single positive number. A monotone iterative scheme for the calculation of the latter is presented and it is shown that the error decays exponentially fast. Our numerical examples suggest that this algorithm allows to employ phase-type distributions with a hundred of phases, which is problematic when using the known formula for the scale function in terms of roots. Extensions to other distributions, such as matrix-exponential and infinite-dimensional phase-type, can be anticipated.