Approximations of small jumps of Lévy processes with a view towards simulation

Abstract

Let X = (X(t):t ≥ 0) be a Lévy process and X∊ the compensated sum of jumps not exceeding ∊ in absolute value, σ2(∊) = var(X∊(1)). In simulation, X - X∊ is easily generated as the sum of a Brownian term and a compound Poisson one, and we investigate here when X∊/σ(∊) can be approximated by another Brownian term. A necessary and sufficient condition in terms of σ(∊) is given, and it is shown that when the condition fails, the behaviour of X∊/σ(∊) can be quite intricate. This condition is also related to the decay of terms in series expansions. We further discuss error rates in terms of Berry-Esseen bounds and Edgeworth approximations.