Optimal consumption and investment with insurer default risk

Jang, Bong-Gyu; Keun, Hyeng; Park, Seyoung

Abstract

We solve the optimal consumption and investment problem in an incomplete market, where borrowing constraints and insurer default risk are considered jointly. We derive in closed-form the optimal consumption and investment strategies. We find two main results by quantitative analysis. As insurer default risk increases, the proportion of wealth invested in stocks could increase when wealth is small, and decrease when wealth is large. As risk aversion increases, the voluntary annuity demand could increase when insurer default risk is low, and decrease when this risk is high.

Citation

Jang, B., Keun, H., & Park, S. (2019). Optimal consumption and investment with insurer default risk. Insurance: Mathematics and Economics, 88, 44-56. https://doi.org/10.1016/j.insmatheco.2019.04.007

• Journal Article Type: Article
• Acceptance Date: Apr 17, 2019
• Online Publication Date: Apr 26, 2019
• Publication Date: 2019-09
• Deposit Date: Jun 18, 2020
• Publicly Available Date: Oct 27, 2020
• Journal: Insurance: Mathematics and Economics
• Print ISSN: 0167-6687
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 88
• Pages: 44-56
• DOI: https://doi.org/10.1016/j.insmatheco.2019.04.007
• Keywords: optimal consumption, optimal investment, insurer default risk, annuity demand
• Public URL: https://nottingham-repository.worktribe.com/output/3985801
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0167668718303329