Risk-minimizing portfolio selection for insurance payment processes under a Markov-modulated model

Linyi Qian; Wei Wang; Rongming Wang

doi:10.3934/jimo.2013.9.411

Article Contents

2013, Volume 9, Issue 2: 411-429. Doi: 10.3934/jimo.2013.9.411

This issue Previous Article A penalty-free method for equality constrained optimization Next Article An optimal financing model: Implications for existence of optimal capital structure

Risk-minimizing portfolio selection for insurance payment processes under a Markov-modulated model

1.
Research Center of International Finance and Risk Management, East China Normal University, Shanghai, 200241
2.
Department of Mathematics, Ningbo University, Ningbo, 315211
3.
School of Finance and Statistics, East China Normal University, Shanghai, 200241

Received: November 2011

Revised: January 2013

Published: April 2013

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Abstract

This paper extends the model in Riesner (2007) to a Markov modulated Lévy process. The parameters of the Lévy process switch over time according to the different states of an economy, which is described by a finite-state continuous time Markov chain. Employing the local risk minimization method, we find an optimal hedging strategy for a general payment process. Finally, we give an example for single unit-linked insurance contracts with guarantee to display the specific locally risk-minimizing hedging strategy.

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Mathematics Subject Classification: Primary: 90C90; Secondary: 60J60.

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