Optimal portfolio choice for an insurer with loss aversion |
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| Affiliation: | 1. University of Technology, Sydney, The Finance Discipline Group, UTS Business School, PO Box 123, Broadway, NSW, 2007, Australia;2. Auckland University of Technology, Department of Finance, Private Bag 92006, 1142 Auckland, New Zealand;3. Università degli Studi di Padova, Dipartimento di Matematica, Via Trieste 63, Padova, Italy;4. Devinci Finance Lab, Pôle Universitaire Léonard de Vinci, 92916 Paris La Défense Cedex, France;5. Quanta Finanza srl, Via Cappuccina 40, Mestre (Venezia), Italy;1. Department of Mathematics, University of Michigan, Ann Arbor, MI, 48109, USA;2. Department of Mathematics, York University, Toronto, Ontario, Canada M3J 1P3;1. China Financial Policy Research Center, School of Finance, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing 100872, PR China;2. Department of Statistics and Actuarial Science, University of Iowa, 241 Schaeffer Hall, Iowa City, IA 52242, USA;3. Department of Risk Management, The Pennsylvania State University, 362 Business Building, University Park, PA 16802, USA;1. Bocconi University, Milan 20135, Italy;2. Finance and Econometrics Groups, Netspar, Tilburg University, Tilburg 5000 LE, The Netherlands;1. Neuflize OBC Investissements (ABN AMRO), France;2. A.A.Advisors-QCG (ABN AMRO), France;3. Variances, France;4. Univ. La Reunion (CEMOI), France;5. Univ. Orleans (LEO/CNRS), France;6. Louis Bachelier Institute, France;7. IPAG Business School, France;8. Univ. Cergy-Pontoise (THEMA), France |
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| Abstract: | ![]()
The problem of optimal investment for an insurance company attracts more attention in recent years. In general, the investment decision maker of the insurance company is assumed to be rational and risk averse. This is inconsistent with non fully rational decision-making way in the real world. In this paper we investigate an optimal portfolio selection problem for the insurer. The investment decision maker is assumed to be loss averse. The surplus process of the insurer is modeled by a Lévy process. The insurer aims to maximize the expected utility when terminal wealth exceeds his aspiration level. With the help of martingale method, we translate the dynamic maximization problem into an equivalent static optimization problem. By solving the static optimization problem, we derive explicit expressions of the optimal portfolio and the optimal wealth process. |
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| Keywords: | Portfolio choice Insurance company Behavioral finance Loss aversion Martingale method |
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