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Minimizing lifetime poverty with a penalty for bankruptcy

Asaf Cohen and Virginia R. Young

Insurance: Mathematics and Economics, 2016, vol. 69, issue C, 156-167

Abstract: We provide investment advice for an individual who wishes to minimize her lifetime poverty, with a penalty for bankruptcy or ruin. We measure poverty via a non-negative, non-increasing function of (running) wealth. Thus, the lower wealth falls and the longer wealth stays low, the greater the penalty. This paper generalizes the problems of minimizing the probability of lifetime ruin and minimizing expected lifetime occupation, with the poverty function serving as a bridge between the two. To illustrate our model, we compute the optimal investment strategies for a specific poverty function and two consumption functions, and we prove some interesting properties of those investment strategies.

Keywords: Poverty; Ruin; Occupation time; Optimal investment; Stochastic control (search for similar items in EconPapers)
JEL-codes: C61 G02 G11 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:69:y:2016:i:c:p:156-167

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Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

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