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Optimal portfolio selection with life insurance under inflation risk

Minsuk Kwak and Byung Hwa Lim

Journal of Banking & Finance, 2014, vol. 46, issue C, 59-71

Abstract: This paper investigates a continuous-time optimal consumption, investment, and life insurance decision problem of a family under inflation risk. In the financial market, there is a liquid inflation-linked index bond market which can be utilized to hedge the inflation risk. The explicit solutions are derived for constant relative risk aversion (CRRA) utility case by using martingale approach. The roles of index bond are investigated and it is verified that the index bond may have different roles depending on the market parameters. We analyze the effects of parameters on the optimal strategies with focus on the optimal demand for index bond and the optimal life insurance premium. Especially, the changes of expected inflation rate and volatility of inflation rate can have both positive and negative impacts on the life insurance premium and their quantitative impacts are considerable.

Keywords: Optimal consumption/investment; Inflation risk; Index bond; Life insurance (search for similar items in EconPapers)
JEL-codes: E31 G11 G22 (search for similar items in EconPapers)
Date: 2014
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