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- Title
ptimal investment for insurers with correlation risk: risk aversion and investment orizon.
- Authors
MEI CHOI CHIU; HONG KONG; HOIYING WONG
- Abstract
This article investigates the optimal investment for insurers with correlation risk, with the variance-covariance matrix among risky financial assets evolving as a stochastic positive definite matrix process. Using the Wishart diffusion matrix process, we formulate the insurer's investment problem as the maximization of the expected constant relative risk-averse utility function subject to stochastic correlation, stochastic volatilities, and Poisson shocks. We obtain the explicit closed-form investment strategy and optimal expected utility through the Hamilton-Jacobi-Bellman framework. A verification theorem is derived to prove the uniform integrability of a tight upper bound for the objective function. The economic implication is that a long-term stable optimal investment policy requires the insurer to maintain a high risk-aversion level when the financial market contains stochastic volatility and/or stochastic correlation.
- Subjects
INVESTMENT advisors; STOCHASTIC analysis; MATHEMATICAL analysis; POISSON distribution; MATRICES (Mathematics)
- Publication
IMA Journal of Management Mathematics, 2018, Vol 29, Issue 2, p207
- ISSN
1471-678X
- Publication type
Article
- DOI
10.1093/imaman/dpx001