Optimal portfolio choice for an insurer with loss aversion

Wenjing Guo

Insurance: Mathematics and Economics, 2014, vol. 58, issue C, 217-222

Abstract: The problem of optimal investment for an insurance company attracts more attention in recent years. In general, the investment decision maker of the insurance company is assumed to be rational and risk averse. This is inconsistent with non fully rational decision-making way in the real world. In this paper we investigate an optimal portfolio selection problem for the insurer. The investment decision maker is assumed to be loss averse. The surplus process of the insurer is modeled by a Lévy process. The insurer aims to maximize the expected utility when terminal wealth exceeds his aspiration level. With the help of martingale method, we translate the dynamic maximization problem into an equivalent static optimization problem. By solving the static optimization problem, we derive explicit expressions of the optimal portfolio and the optimal wealth process.

Keywords: Portfolio choice; Insurance company; Behavioral finance; Loss aversion; Martingale method (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:58:y:2014:i:c:p:217-222

DOI: 10.1016/j.insmatheco.2014.07.004

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