Optimal investment for insurers with the extended CIR interest rate model

Mei Choi CHIU, Hoi Ying WONG

Research output: Contribution to journalArticles

2 Citations (Scopus)

Abstract

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. Copyright © 2014 Mei Choi Chiu and Hoi Ying Wong.

Original languageEnglish
Article number129474
JournalAbstract and Applied Analysis
Volume2014
DOIs
Publication statusPublished - 2014

Citation

Chiu, M. C., & Wong, H. Y. (2014). Optimal investment for insurers with the extended CIR interest rate model. Abstract and Applied Analysis, 2014, art no. 129474.

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