Optimal Investment-Consumption and Life Insurance Strategy with Mispricing and Model Ambiguity

Ailing Gu (), Xinya He (), Shumin Chen () and Haixiang Yao ()
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Ailing Gu: Guangdong University of Technology
Xinya He: Guangdong University of Technology
Shumin Chen: Guangdong University of Technology
Haixiang Yao: Guangdong University of Foreign Studies

Methodology and Computing in Applied Probability, 2023, vol. 25, issue 3, 1-19

Abstract: Abstract In this paper, we consider the optimal investment-consumption and life insurance strategy for a wage earner who has uncertain labor income described by an Ornstein-Uhlenbeck process. In addition to consumption and purchasing life insurance, the wage earner invests his wealth in the financial market, which consists of a risk-free asset, a market index, and a pair of risky assets with mispricing. Our aim is to maximize the expected utilities obtained from consumption, bequest, or his wealth at the end of the decision horizon. With the dynamic programming approach, we obtain explicit solutions for the optimization problem by solving the corresponding HJB equation. Finally, several numerical examples are presented to illustrate our results.

Keywords: Mispricing; Model ambiguity; Optimal investment strategy; Life insurance; Dynamic programming approach; 90C39 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11009-023-10051-0

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