Explicit solutions of optimal consumption, investment and insurance problems with regime switching
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Publication:2513631
DOI10.1016/J.INSMATHECO.2014.07.006zbMATH Open1304.91142arXiv1402.3562OpenAlexW2016174755MaRDI QIDQ2513631FDOQ2513631
Authors: Bin Zou, Abel Cadenillas 
Publication date: 28 January 2015
Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1402.3562
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- Optimal life-cycle consumption and investment decisions under age-dependent risk preferences
- Optimal investment and dividend for an insurer under a Markov regime switching market with high gain tax
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- 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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