Minimizing the probability of lifetime exponential Parisian ruin (Q2302841)
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English | Minimizing the probability of lifetime exponential Parisian ruin |
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Minimizing the probability of lifetime exponential Parisian ruin (English)
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26 February 2020
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The authors consider the problem of optimal investment produced in order to minimize the probability of lifetime exponential Parisian ruin, that is, the probability that wealth stays below zero longer than an exponentially distributed time and before the individual dies. The individual consumes and invests in a Black-Scholes financial market consisting of one riskless and one risky asset, whose price process follows a geometric Brownian motion. It is established that individuals leverage more when wealth is negative if they minimize the probability of lifetime exponential Parisian ruin than in the case when they minimize the probability of lifetime ruin. Moreover, when wealth is negative, the optimal amount invested in the risky asset increases as the hazard rate of the exponential ``excursion clock'' increases. In view of the heavy leveraging when wealth is negative, the authors also compute the minimum probability of lifetime exponential Parisian ruin under a constraint on investment. Finally, they derive an asymptotic expansion of the minimum probability of lifetime exponential Parisian ruin for small values of the hazard rate of the excursion clock.
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exponential Parisian ruin
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Black-Scholes financial market
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optimal investment
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leverage
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stochastic control
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asymptotic expansion of the minimum probability
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