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Investment Strategy and Ruin Probabilities of Insurance Company under the CAPM Model

Author: ChenKe
Tutor: HeChunXiong
School: South China University of Technology
Course: Probability Theory and Mathematical Statistics
Keywords: Ruin probability Investment Strategy Geometric Brownian motion Continuous-time CAPM model
CLC: F840.3
Type: Master's thesis
Year: 2011
Downloads: 161
Quote: 0
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Abstract


In insurance practice, the insurance company will invest its funds to risk species such that Stocks, funds, futures, bonds, etc, so that it can effectively control its ruin probability. And so, the research of the investment strategy and bankruptcy probability has become a hot spot. However, previous studies in this area are considered only a variety of investment can be used to invest, which is clearly incompatible with the actual situation, because in reality, the insurance company may also invest in many types of investment products, and The more alternative investment products, the insurance company can more effectively control the bankruptcy probability. Thus expanding research in the investment strategy and the bankruptcy probability of insurance companies when them invest in many types of investment products has a strong theoretical value.In this paper, the ruin probability and investment strategy issues will be researched when insurance companies can simultaneously invest in market index and individual stocks. first we study the situation that the stock market index and individual stocks follow the general continuous time CAPM model in which the market index and stock prices are subject to a geometric Brownian motion, and stock return is composed of market index return and Random errors which is constent with the classic two-period CAPM model. In this model, the paper deduced when the insurance companies invest fixed capital in the market index and do not invest in individual stocks, The ruin probability is bounded and the more the initial capital of insurance companies is, the smaller the upper bound of ruin probability is. So when the insurance company’s initial capital is sufficient, This investment strategy can be effectively used to control the ruin probability. Then, the paper further study he situation that the stock market index and individual stocks follow the promotion continuous time CAPM model, in which stock return is composed of market index return, Random errors and a growth item. In this model,the paper deduced when the insurance companies invest fixed capital in the market index and individual stocks, The ruin probability is bounded and the stronget the ability to growth of individual stock the more the capital is invested to individual stock. Finally, the paper give the concrete form of investment strategy and ruin probability when claim is subject to exponential distribution and the parameters are given.

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CLC: > Economic > Fiscal, monetary > Insurance > Insurance Theory > Insurance organization and management
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