Explicit solutions of optimal consumption, investment and insurance problems with regime switching

DOI10.1016/J.INSMATHECO.2014.07.006MaRDI QIDQ2513631zbMATH OpenOpenAlexFDO

Authors Bin Zou, Abel Cadenillas

Publication date 28 January 2015

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1402.3562

zbMATH Keywords

regime switchingHamilton-Jacobi-Bellman equationutility maximizationinsuranceeconomic analysis

Mathematics Subject Classification ID

Portfolio theory (91G10)

Abstract: We consider an investor who wants to select her/his optimal consumption, investment and insurance policies. Motivated by new insurance products, we allow not only the financial marke but also the insurable loss to depend on the regime of the economy. The objective of the investor is to maximize her/his expected total discounted utility of consumption over an infinite time horizon. For the case of hyperbolic absolute risk aversion (HARA) utility functions, we obtain the first explicit solutions for simultaneous optimal consumption, investment, and insurance problems when there is regime switching. We determine that the optimal insurance contract is either no-insurance or deductible insurance, and calculate when it is optimal to buy insurance. The optimal policy depends strongly on the regime of the economy. Through an economic analysis, we calculate the advantage of buying insurance.

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Cites work

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• EXPLICIT SOLUTIONS OF CONSUMPTION-INVESTMENT PROBLEMS IN FINANCIAL MARKETS WITH REGIME SWITCHING
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Cited in

(12)

• Demand for non-life insurance under habit formation
• Optimal consumption/investment and life insurance with regime-switching financial market parameters
• Dynamic programming for an investmentćonsumption problem in illiquid markets with regime-switching
• Personal non-life insurance decisions and the welfare loss from flat deductibles
• Explicit solutions of optimal consumption, investment and insurance problems with regime switching
• Optimal life-cycle consumption and investment decisions under age-dependent risk preferences
• Optimal investment strategy and liability ratio for insurer with Lévy risk process
• Optimal investment and dividend for an insurer under a Markov regime switching market with high gain tax
• Optimal investment and reinsurance strategies for an insurer with regime-switching
• EXPLICIT SOLUTIONS OF CONSUMPTION-INVESTMENT PROBLEMS IN FINANCIAL MARKETS WITH REGIME SWITCHING
• Editorial to the special issue on behavioral insurance: mathematics and economics
• Optimal consumption, investment, and insurance under state-dependent risk aversion

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