Robust asset-liability management games for n players under multivariate stochastic covariance models

Ning Wang and Yumo Zhang

Insurance: Mathematics and Economics, 2024, vol. 117, issue C, 67-98

Abstract: This paper investigates a non-zero-sum stochastic differential game among n competitive CARA asset-liability managers, who are concerned about the potential model ambiguity and aim to seek the robust investment strategies. The ambiguity-averse managers are subject to uncontrollable and idiosyncratic random liabilities driven by generalized drifted Brownian motions and have access to an incomplete financial market consisting of a risk-free asset, a market index and a stock under a multivariate stochastic covariance model. The market dynamics permit not only stochastic correlation between the risky assets but also path-dependent and time-varying risk premium and volatility, depending on two affine-diffusion factor processes. The objective of each manager is to maximize the expected exponential utility of his terminal surplus relative to the average among his competitors under the worst-case scenario of the alternative measures. We manage to solve this robust non-Markovian stochastic differential game by using a backward stochastic differential equation approach. Explicit expressions for the robust Nash equilibrium investment policies, the density generator processes under the well-defined worst-case probability measures and the corresponding value functions are derived. Conditions for the admissibility of the robust equilibrium strategies are provided. Finally, we perform some numerical examples to illustrate the influence of model parameters on the equilibrium investment strategies and draw some economic interpretations from these results.

Keywords: Asset-liability management; Model ambiguity; Nash equilibrium; Stochastic covariance model; Backward stochastic differential equation (search for similar items in EconPapers)
JEL-codes: C61 C73 G11 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:117:y:2024:i:c:p:67-98

DOI: 10.1016/j.insmatheco.2024.04.001

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