Precommitted Investment Strategy versus Time-Consistent Investment Strategy for a Dual Risk Model

Lidong Zhang, Ximin Rong and Ziping Du

Discrete Dynamics in Nature and Society, 2014, vol. 2014, 1-13

Abstract:

We are concerned with optimal investment strategy for a dual risk model. We assume that the company can invest into a risk-free asset and a risky asset. Short-selling and borrowing money are allowed. Due to lack of iterated-expectation property, the Bellman Optimization Principle does not hold. Thus we investigate the precommitted strategy and time-consistent strategy, respectively. We take three steps to derive the precommitted investment strategy. Furthermore, the time-consistent investment strategy is also obtained by solving the extended Hamilton-Jacobi-Bellman equations. We compare the precommitted strategy with time-consistent strategy and find that these different strategies have different advantages: the former can make value function maximized at the original time and the latter strategy is time-consistent for the whole time horizon. Finally, numerical analysis is presented for our results.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:972487

DOI: 10.1155/2014/972487

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