Gerber-Shiu Theory for Discrete Risk Processes in a Regime Switching Environment

TL;DR

This paper extends Gerber-Shiu theory to discrete risk models in a regime switching environment, providing explicit formulas using scale matrices for risk assessment and dividend strategies.

Contribution

It introduces a unified approach to compute Gerber-Shiu functions in Markovian regime switching discrete risk processes using scale matrices.

Findings

Derived closed-form expressions for Gerber-Shiu functions.

Unified approach for risk and dividend barrier problems.

Expressed Gerber-Shiu functions in terms of scale matrices.

Abstract

In this paper we develop the Gerber-Shiu theory for the classic and dual discrete risk processes in a Markovian (regime switching) environment. In particular, by expressing the Gerber-Shiu function in terms of potential measures of an upward (downward) skip-free discrete-time and discrete-space Markov Additive Process (MAP), we derive closed form expressions for the Gerber-Shiu function in terms of the so-called (discrete) $\boldsymbol{W}_v$ and $\boldsymbol{Z}_v$ scale matrices, which were introduced in arXiv:2008.06697. We show that the discrete scale matrices allow for a unified approach for identifying the Gerber-Shiu function as well as the value function of the associated constant dividend barrier problems.