Abstract
This paper considers optimal investment and risk control problem under the Hull and White Stochastic Volatility (SV) model for an Insurer who aims to optimize the investment and risk control strategies. The surplus process of the insurer is assumed to follow the Brownian motion with drift. An Insurer can invest in the financial market consisting of risk-free and risky assets whose price process satisfies Hull-White SV model. By applying the stochastic dynamic programming approach, we derive closed-form expressions for the optimal strategies and the value function. We find that under the Hull and White model, the interest rate and risk aversion parameters both influence optimal strategies. Moreover, we provide a numerical example to illustrate the model’s economic implications.
Highlights
The insurance company is a financial intermediary obliged for compensation to a client if an uncertain event occurs
This paper considers optimal investment and risk control problem under the Hull and White Stochastic Volatility (SV) model for an Insurer who aims to optimize the investment and risk control strategies
An Insurer can invest in the financial market consisting of risk-free and risky assets whose price process satisfies Hull-White SV model
Summary
The insurance company is a financial intermediary obliged for compensation to a client if an uncertain event occurs. [1] [2] applied the classical Cramér-Lundberg model to describe the risk process where the insurer can invest in a risky asset only to minimize the ruin probability. While [15] assumed that the instantaneous nominal interest rate follows the Ornstein-Uhlenbeck process They applied stochastic dynamic programming to derive the closed-forms of optimal reinsurance and investment strategies. We assume that the price of risky assets follows the Hull and White Stochastic Volatility Model.
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