Time-consistent mean-variance investment with unit linked life insurance contracts in a jump-diffusion setting

Frank Bosserhoff and Mitja Stadje

Insurance: Mathematics and Economics, 2021, vol. 100, issue C, 130-146

Abstract: We consider a time-consistent mean–variance portfolio selection problem of an insurer and allow for the incorporation of basis (mortality) risk. The optimal solution is identified with a Nash subgame perfect equilibrium. We characterize an optimal strategy as solution of a system of partial integro-differential equations (PIDEs), a so called extended Hamilton–Jacobi–Bellman (HJB) system. We prove that the equilibrium is necessarily a solution of the extended HJB system. Under certain conditions we obtain an explicit solution to the extended HJB system and provide the optimal trading strategies in closed-form. A simulation shows that the previously found strategies yield payoffs whose expectations and variances are robust regarding the distribution of jump sizes of the stock. The same phenomenon is observed when the variance is correctly estimated, but erroneously ascribed to the diffusion components solely. Further, we show that differences in the insurance horizon and the time to maturity of a longevity asset do not add to the variance of the terminal wealth.

Keywords: Risk management; Life insurance; Mean–variance; Time-consistency; Jump-diffusion (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:100:y:2021:i:c:p:130-146

DOI: 10.1016/j.insmatheco.2021.03.015

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