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Robust optimal control for an insurer with reinsurance and investment under Heston’s stochastic volatility model

Bo Yi, Zhongfei Li, Frederi G. Viens and Yan Zeng

Insurance: Mathematics and Economics, 2013, vol. 53, issue 3, 601-614

Abstract: This paper considers a robust optimal reinsurance and investment problem under Heston’s Stochastic Volatility (SV) model for an Ambiguity-Averse Insurer (AAI), who worries about model misspecification and aims to find robust optimal strategies. The surplus process of the insurer is assumed to follow a Brownian motion with drift. The financial market consists of one risk-free asset and one risky asset whose price process satisfies Heston’s SV model. By adopting the stochastic dynamic programming approach, closed-form expressions for the optimal strategies and the corresponding value functions are derived. Furthermore, a verification result and some technical conditions for a well-defined value function are provided. Finally, some of the model’s economic implications are analyzed by using numerical examples and simulations. We find that ignoring model uncertainty leads to significant utility loss for the AAI. Moreover we propose an alternative model and associated investment strategy which can be considered more adequate under certain finance interpretations, and which leads to significant improvements in our numerical example.

Keywords: Reinsurance and investment strategy; Stochastic volatility; Robust optimal control; Utility maximization; Ambiguity-Averse Insurer (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.insmatheco.2013.08.011

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