Optimal investment under transaction costs for an insurer

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We deal with the problem of minimizing the probability of ruin of an insurer by optimal investment of parts of the surplus in the financial market, modeled by geometric Brownian motion. In a diffusion framework the classical solution to this problem is to hold a constant amount of money in stocks, which in practice means continuous adaption of the investment position. In this paper, we introduce both proportional and fixed transaction costs, which leads to a more realistic scenario. In mathematical terms, the problem is now of impulse control type. Its solution is characterized and calculated by iteration of associated optimal stopping problems. Finally some numerical examples illustrate the resulting optimal investment policy and its deviation from the optimal investment behaviour without transaction costs.

Original language English 359-383 25 European Actuarial Journal 3 2 https://doi.org/10.1007/s13385-013-0078-4 Published - 1 Dec 2013 Yes

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Optimal Investment
Transaction Costs
Impulse Control
Probability of Ruin
Geometric Brownian Motion
Optimal Stopping Problem
Financial Markets
Classical Solution
Deviation
Directly proportional
Iteration
Numerical Examples
Scenarios
Term
Transaction costs
Insurer
Optimal investment

ASJC Scopus subject areas

• Statistics and Probability
• Economics and Econometrics
• Statistics, Probability and Uncertainty

Fields of Expertise

• Information, Communication & Computing

Cite this

In: European Actuarial Journal, Vol. 3, No. 2, 01.12.2013, p. 359-383.

Research output: Contribution to journalArticleResearchpeer-review

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