Demand for catastrophe insurance under the path-dependent effects

Liyuan Cui and Wenyuan Li

Papers from arXiv.org

Abstract: This paper investigates optimal investment and insurance strategies under a mean-variance criterion with path-dependent effects. We use a rough volatility model and a Hawkes process with a power kernel to capture the path dependence of the market. By adding auxiliary state variables, we degenerate a non-Markovian problem to a Markovian problem. Next, an explicit solution is derived for a path-dependent extended Hamilton-Jacobi-Bellman (HJB) equation. Then, we derive the explicit solutions of the problem by extending the Functional Ito formula for fractional Brownian motion to the general path-dependent processes, which includes the Hawkes process. In addition, we use earthquake data from Sichuan Province, China, to estimate parameters for the Hawkes process. Our numerical results show that the individual becomes more risk-averse in trading when stock volatility is rough, while more risk-seeking when considering catastrophic shocks. Moreover, an individual's demand for catastrophe insurance increases with path-dependent effects. Our findings indicate that ignoring the path-dependent effect would lead to a significant underinsurance phenomenon and highlight the importance of the path-dependent effect in the catastrophe insurance pricing.

Date: 2025-08
New Economics Papers: this item is included in nep-cna and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2508.15355 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2508.15355

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().