Optimal Investment and Liability Ratio Policies in a Multidimensional Regime Switching Model

Bin Zou and Abel Cadenillas
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Bin Zou: Department of Applied Mathematics, University of Washington, Lewis Hall 202, Box 353925, Seattle, WA 98195-3925, USA
Abel Cadenillas: Department of Mathematical and Statistical Sciences, University of Alberta, Central Academic Building 639, Edmonton, AB T6G 2G1, Canada

Risks, 2017, vol. 5, issue 1, 1-22

Abstract: We consider an insurer who faces an external jump-diffusion risk that is negatively correlated with the capital returns in a multidimensional regime switching model. The insurer selects investment and liability ratio policies continuously to maximize her/his expected utility of terminal wealth. We obtain explicit solutions of optimal policies for logarithmic and power utility functions. We study the impact of the insurer’s risk aversion, the negative correlation between the external risk and the capital returns, and the regime of the economy on the optimal policy. We find, among other things, that the regime of the economy and the negative correlation between the external risk and the capital returns have a dramatic effect on the optimal policy.

Keywords: insurance; jump diffusion; optimal investment and liability; regime switching; risk management; stochastic control (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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