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Research on Insurer’s Optimal Investment Strategy under Constant Elasticity of Variance (CEV) Model

Author: FanLiZuo
Tutor: RongXiMin
School: Tianjin University
Course: Operational Research and Cybernetics
Keywords: Insurance Fund CEV model Utility function Stochastic control theory HJB equation Legendre transformation
CLC: F840
Type: Master's thesis
Year: 2010
Downloads: 66
Quote: 1
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Abstract


An important feature of the modern insurance industry is underwriting business both business and funds, both the development of the insurance industry are of great significance. As China's market-oriented economic performance enhancement and deepening of the reform, China's insurance business increasingly wide range of increasingly fierce competition in the insurance industry. In this case, the insurance people, the use of insurance funds to invest particularly important. Stochastic control theory study on the investment portfolio has an important role. In recent years, the method increasingly used in the study of the insurance fund investment. As Browne (1995), Hipp and Taksar (2000), Hipp and Plum (2000), Liu (2004), Gerber (2004), Yang (2005) and other articles are made of stochastic optimal control theory Optimal Investment Insurers policies. But these articles assume risk asset prices obey the classical geometric Brownian motion model, the model assumes that the risk asset price volatility is constant, so its not very well portrayed actual market implied volatility asymmetry. Constant Elasticity of Variance (CEV) model is a geometric Brownian motion, a natural expansion of the traditional geometric Brownian motion model comparison, CEV model assumes a constant elasticity volatility, consider the asset market volatility and risk the relationship between prices, more practical significance. CEV model first proposed by Cox and Ross (1976) propose, then, Cox (1996), Davydov and Linetsky (2001) and other articles applied CEV option pricing model; Xiaojian Wu (2004), Gao (2009) and other articles using CEV model the investment of pension funds. Currently, CEV model has not been used in direct insurance fund investment research. In this paper, the analysis of the above-mentioned article, based on research-based CEV model insurance fund investment issues. This article assumes that risky asset price follows CEV model, insurers risk process is Brownian motion with drift. Because insurance is different from the general fund's investment funds, which in considering investment income, we must also be alert to the underwriting risks from behind, so this article assumes investment risk associated with underwriting risk entirely, according to stochastic optimal control theory, the insurance fund investment issues HJB equation. Since the equations are nonlinear partial differential equations, is not easy to solve, so using the Legendre transformation to convert paired dual issues. In this paper a particular parameter values ??were obtained by CARA and CRRA utility function as the goal of the insurer's optimal investment strategy, such an investment strategy more in line with the actual requirements of the financial markets.

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CLC: > Economic > Fiscal, monetary > Insurance > Insurance Theory
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