Optimal reinsurance-investment problem with dependent risks based on Legendre transform

Yan Zhang; Peibiao Zhao

doi:10.3934/jimo.2019011

Article Contents

2020, Volume 16, Issue 3: 1457-1479. Doi: 10.3934/jimo.2019011

This issue Previous Article Forecast horizon of dynamic lot size model for perishable inventory with minimum order quantities Next Article Solving higher order nonlinear ordinary differential equations with least squares support vector machines

Optimal reinsurance-investment problem with dependent risks based on Legendre transform

Yan Zhang^1,2, and
Peibiao Zhao^1, ,

1.
School of Science, Nanjing University of Science and Technology, Nanjing 210094, China
2.
College of Science, Army Engineering University of PLA, Nanjing 211101, China

^* Corresponding author
^* Corresponding author

Received: March 31, 2018

Revised: September 30, 2018

Early access: March 2019

Published: March 2020

This work was supported by NNSF of China (No.11871275; No.11371194)

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Abstract

This paper investigates an optimal reinsurance-investment problem in relation to thinning dependent risks. The insurer's wealth process is described by a risk model with two dependent classes of insurance business. The insurer is allowed to purchase reinsurance and invest in one risk-free asset and one risky asset whose price follows CEV model. Our aim is to maximize the expected exponential utility of terminal wealth. Applying Legendre transform-dual technique along with stochastic control theory, we obtain the closed-form expression of optimal strategy. In addition, our wealth process will reduce to the classical Cramér-Lundberg (C-L) model when $ p = 0 $, in this case, we achieve the explicit expression of the optimal strategy for Hyperbolic Absolute Risk Aversion (HARA) utility by using Legendre transform. Finally, some numerical examples are presented to illustrate the impact of our model parameters (e.g., interest and volatility) on the optimal reinsurance-investment strategy.

Keywords:

Mathematics Subject Classification: Primary: 91B30, 93E20; Secondary: 62P05.

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Figure 1. Effect of $ t $ on the optimal reinsurance strategies

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Figure 2. Effect of $ v $ on the optimal reinsurance strategies

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Figure 3. Effect of $ p $ on the optimal reinsurance strategies

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Figure 4. Effect of $ \alpha _1 $ on the optimal reinsurance strategies

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Figure 5. Effect of $ \alpha _2 $ on the optimal reinsurance strategies

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Figure 6. Effect of $ s $ on the optimal investment strategy

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Figure 7. Effect of $ \mu - r $ on the optimal investment strategy

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Figure 8. Effect of $ \sigma $ on the optimal investment strategy

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