Abstract
In this paper, we study the optimal investment and optimal reinsurance problem for an insurer under the criterion of mean-variance. The insurer’s risk process is modeled by a compound Poisson process and the insurer can invest in a risk-free asset and a risky asset whose price follows a jump-diffusion process. In addition, the insurer can purchase new business (such as reinsurance). The controls (investment and reinsurance strategies) are constrained to take nonnegative values due to nonnegative new business and no-shorting constraint of the risky asset. We use the stochastic linear-quadratic (LQ) control theory to derive the optimal value and the optimal strategy. The corresponding Hamilton–Jacobi–Bellman (HJB) equation no longer has a classical solution. With the framework of viscosity solution, we give a new verification theorem, and then the efficient strategy (optimal investment strategy and optimal reinsurance strategy) and the efficient frontier are derived explicitly.
Similar content being viewed by others
References
Merton, R.C.: Theory of rational option pricing. Bell J. Econ. Manag. Sci. 4(1), 141–183 (1973)
Zhou, C.: A jump-diffusion approach to modeling credit risk and valuing defaultable securities (March 1997). Available at SSRN: http://ssrn.com/abstract=39800 or http://dx.doi.org/10.2139/ssrn.39800
Schmidt, T., Stute, W.: Shot-noise processes and the minimal martingale measure. Stat. Probab. Lett. 77(12), 1332–1338 (2007)
Browne, S.: Optimal investment policies for a firm with a random risk process: exponential utility and minimizing the probability of ruin. Math. Oper. Res. 20(4), 937–958 (1995)
Hipp, C., Plum, M.: Optimal investment for insurers. Insur. Math. Econ. 27(2), 215–228 (2000)
Gaier, J., Grandits, P., Schachermayer, W.: Asymptotic ruin probabilities and optimal investment. Ann. Appl. Probab. 13(3), 1054–1076 (2003)
Wang, Z., Xia, J., Zhang, L.: Optimal investment for an insurer: the martingale approach. Insur. Math. Econ. 40(2), 322–334 (2007)
Schmidli, H.: On minimizing the ruin probability by investment and reinsurance. Ann. Appl. Probab. 12(3), 890–907 (2002)
Bäuerle, N.: Benchmark and mean-variance problems for insurers. Math. Methods Oper. Res. 62(1), 159–165 (2005)
Bai, L., Zhang, H.: Dynamic mean-variance problem with constrained risk control for the insurers. Math. Methods Oper. Res. 68(1), 181–205 (2008)
Markowitz, H.: Portfolio selection. J. Finance 7(1), 77–91 (1952)
Merton, R.C.: An analytical derivation of the efficient portfolio frontier. J. Financ. Quant. Anal. 7(4), 1851–1872 (1972)
Zhou, X.Y., Li, D.: Continuous-time mean-variance portfolio selection: a stochastic LQ framework. Appl. Math. Optim. 42(1), 19–33 (2000)
Li, X., Zhou, X.Y., Lim, A.E.B.: Dynamic mean-variance portfolio selection with no-shorting constraints. SIAM J. Control Optim. 40(5), 1540–1555 (2002)
Lim, A.E.B., Zhou, X.Y.: Mean-variance portfolio selection with random parameters in a complete market. Math. Oper. Res. 27(1), 101–120 (2002)
Yong, J.M., Zhou, X.Y.: Stochastic Controls: Hamilton Systems and HJB Equations. Springer, New York (1999)
Fleming, W.H., Soner, H.M.: Controlled Markov Processes and Viscosity Solutions. Springer, Berlin, New York (1993)
Delong, L., Gerrard, R.: Mean-variance portfolio selection for a non-life insurance company. Math. Methods Oper. Res. 66(2), 339–367 (2007)
Zhou, X.Y., Yong, J., Li, X.: Stochastic verification theorems within the framework of viscosity solutions. SIAM J. Control Optim. 35(1), 243–253 (1997)
Luenberger, D.G.: Optimization by Vector Space Methods. Wiley, New York (1968)
Brémaud, P.: Point Processes and Queues. Springer, New York (1981)
Acknowledgements
This work is supported by National Natural Science Foundation of China (Grant No. 11171164).
Author information
Authors and Affiliations
Corresponding author
Additional information
Communicated by Xiao Qi Yang.
Rights and permissions
About this article
Cite this article
Bi, J., Guo, J. Optimal Mean-Variance Problem with Constrained Controls in a Jump-Diffusion Financial Market for an Insurer. J Optim Theory Appl 157, 252–275 (2013). https://doi.org/10.1007/s10957-012-0138-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10957-012-0138-y