Minimizing the probability of lifetime exponential Parisian ruin

DOI10.1007/S10957-019-01595-8MaRDI QIDQ2302841zbMATH OpenOpenAlexWikidataFDO

Authors Xiaoqing Liang, Virginia R. Young

Publication date 26 February 2020

Published in Journal of Optimization Theory and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2104.12638

zbMATH Keywords

asymptotic expansion of the minimum probabilityBlack-Scholes financial marketexponential Parisian ruinleverageoptimal investmentstochastic control

Mathematics Subject Classification ID

Optimality conditions for free problems in two or more independent variables (49K10) Portfolio theory (91G10) Optimal stochastic control (93E20)

Abstract: We find the optimal investment strategy in a Black-Scholes market to minimize the probability of so-called {it lifetime exponential Parisian ruin}, that is, the probability that wealth exhibits an excursion below zero of an exponentially distributed time before the individual dies. We find that leveraging the risky asset is worse for negative wealth when minimizing the probability of lifetime exponential Parisian ruin than when minimizing 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, we also compute the minimum probability of lifetime exponential Parisian ruin under a constraint on investment. Finally, we derive an asymptotic expansion of the minimum probability of lifetime exponential Parisian ruin for small values of the hazard rate of the excursion clock. It is interesting to find that, for small values of this hazard rate, the minimum probability of lifetime exponential Parisian ruin is proportional to the minimum occupation time studied in Bayraktar and Young, and the proportion equals the hazard rate. To the best of our knowledge, our work is the first to {it control} the probability of Parisian ruin.

Review text

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.

Recommendations

• Optimal investment for minimizing the probability of lifetime ruin
• A simple and nearly optimal investment strategy to minimize the probability of lifetime ruin
• Optimal Investment Strategy to Minimize the Probability of Lifetime Ruin
• Minimizing the lifetime shortfall or shortfall at death
• Minimizing the discounted probability of exponential Parisian ruin via reinsurance

Cites work

• An insurance risk model with Parisian implementation delays
• Brownian Excursions and Parisian Barrier Options
• scientific article; zbMATH DE number 51724 (Why is no real title available?)
• scientific article; zbMATH DE number 3397998 (Why is no real title available?)
• Minimizing the discounted probability of exponential Parisian ruin via reinsurance
• Minimizing the probability of lifetime ruin under ambiguity aversion
• Minimizing the probability of lifetime ruin under borrowing constraints
• Minimizing the probability of lifetime ruin under stochastic volatility
• Minimizing the probability of ruin: two riskless assets with transaction costs and proportional reinsurance
• Occupation times of spectrally negative Lévy processes with applications
• On the distribution of cumulative Parisian ruin
• Optimal and simple, nearly optimal rules for minimizing the probability of financial ruin in retirement
• Optimal investment strategy to minimize occupation time
• Optimal Investment Strategy to Minimize the Probability of Lifetime Ruin
• Parisian ruin probability for spectrally negative Lévy processes
• Ruin probability with Parisian delay for a spectrally negative Lévy risk process
• Self-Annuitization and Ruin in Retirement
• Stochastic Perron's method for the probability of lifetime ruin problem under transaction costs

Cited in

(4)

• Minimizing the discounted probability of exponential Parisian ruin via reinsurance
• Optimal active lifetime investment
• Annuitizing at a bounded, absolutely continuous rate to minimize the probability of lifetime ruin
• Optimal timing of business conversion for solvency improvement

This page was built for publication: Minimizing the probability of lifetime exponential Parisian ruin

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2302841)