Optimal Investment for Insurers with the Extended CIR Interest Rate Model
A fundamental challenge for insurance companies (insurers) is to strike the best balance between optimal investment and risk management of paying insurance liabilities, especially in a low interest rate environment. The stochastic interest rate becomes a critical factor in this asset-liability manag...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Wiley
2014-01-01
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| Series: | Abstract and Applied Analysis |
| Online Access: | http://dx.doi.org/10.1155/2014/129474 |
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| Summary: | A fundamental challenge for insurance companies (insurers) is to strike the best balance
between optimal investment and risk management of paying insurance liabilities, especially
in a low interest rate environment. The stochastic interest rate becomes a critical
factor in this asset-liability management (ALM) problem. This paper derives the closed-form
solution to the optimal investment problem for an insurer subject to the insurance liability
of compound Poisson process and the stochastic interest rate following the extended
CIR model. Therefore, the insurer’s wealth follows a jump-diffusion model with stochastic
interest rate when she invests in stocks and bonds. Our problem involves maximizing the
expected constant relative risk averse (CRRA) utility function subject to stochastic interest
rate and Poisson shocks. After solving the stochastic optimal control problem with the
HJB framework, we offer a verification theorem by proving the uniform integrability of a
tight upper bound for the objective function. |
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| ISSN: | 1085-3375 1687-0409 |