Optimal Consumption and Insurance: A Continuous-time Markov Chain Approach

Holger Kraft and Mogens Steffensen

ASTIN Bulletin, 2008, vol. 38, issue 1, 231-257

Abstract: Personal financial decision making plays an important role in modern finance. Decision problems about consumption and insurance are in this article modelled in a continuous-time multi-state Markovian framework. The optimal solution is derived and studied. The model, the problem, and its solution are exemplified by two special cases: In one model the individual takes optimal positions against the risk of dying; in another model the individual takes optimal positions against the risk of losing income as a consequence of disability or unemployment.

Date: 2008
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