Optimal excess-of-loss reinsurance and investment problem for an insurer with default risk under a stochastic volatility model

Nian Yao and Zhiming Yang

Papers from arXiv.org

Abstract: In this paper, we study an optimal excess-of-loss reinsurance and investment problem for an insurer in defaultable market. The insurer can buy reinsurance and invest in the following securities: a bank account, a risky asset with stochastic volatility and a defaultable corporate bond. We discuss the optimal investment strategy into two subproblems: a pre-default case and a post-default case. We show the existence of a classical solution to a pre-default case via super-sub solution techniques and give an explicit characterization of the optimal reinsurance and investment policies that maximize the expected CARA utility of the terminal wealth. We prove a verification theorem establishing the uniqueness of the solution. Numerical results are presented in the case of the Scott model and we discuss economic insights obtained from these results.

Date: 2017-04
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1704.08234

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