Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility
This paper investigates the investment and reinsurance problem in the presence of stochastic volatility for an ambiguity-averse insurer (AAI) with a general concave utility function. The AAI concerns about model uncertainty and seeks for an optimal robust decision. We consider a Brownian motion with...
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| Format: | Journal Article |
| Language: | English |
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2016
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| Online Access: | https://hdl.handle.net/10356/81380 http://hdl.handle.net/10220/40731 |
| _version_ | 1811684258793652224 |
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| author | Pun, Chi Seng Wong, Hoi Ying |
| author2 | School of Physical and Mathematical Sciences |
| author_facet | School of Physical and Mathematical Sciences Pun, Chi Seng Wong, Hoi Ying |
| author_sort | Pun, Chi Seng |
| collection | NTU |
| description | This paper investigates the investment and reinsurance problem in the presence of stochastic volatility for an ambiguity-averse insurer (AAI) with a general concave utility function. The AAI concerns about model uncertainty and seeks for an optimal robust decision. We consider a Brownian motion with drift for the surplus of the AAI who invests in a risky asset following a multiscale stochastic volatility (SV) model. We formulate the robust optimal investment and reinsurance problem for a general class of utility functions under a general SV model. Applying perturbation techniques to the Hamilton–Jacobi–Bellman–Isaacs (HJBI) equation associated with our problem, we derive an investment–reinsurance strategy that well approximates the optimal strategy of the robust optimization problem under a multiscale SV model. We also provide a practical strategy that requires no tracking of volatility factors. Numerical study is conducted to demonstrate the practical use of theoretical results and to draw economic interpretations from the robust decision rules. |
| first_indexed | 2024-10-01T04:25:47Z |
| format | Journal Article |
| id | ntu-10356/81380 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T04:25:47Z |
| publishDate | 2016 |
| record_format | dspace |
| spelling | ntu-10356/813802023-02-28T19:31:29Z Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility Pun, Chi Seng Wong, Hoi Ying School of Physical and Mathematical Sciences Investment and reinsurance Mixture of power utilities Hamilton–Jacobi–Bellman–Isaacs equation Multiscale stochastic volatility Perturbation methods This paper investigates the investment and reinsurance problem in the presence of stochastic volatility for an ambiguity-averse insurer (AAI) with a general concave utility function. The AAI concerns about model uncertainty and seeks for an optimal robust decision. We consider a Brownian motion with drift for the surplus of the AAI who invests in a risky asset following a multiscale stochastic volatility (SV) model. We formulate the robust optimal investment and reinsurance problem for a general class of utility functions under a general SV model. Applying perturbation techniques to the Hamilton–Jacobi–Bellman–Isaacs (HJBI) equation associated with our problem, we derive an investment–reinsurance strategy that well approximates the optimal strategy of the robust optimization problem under a multiscale SV model. We also provide a practical strategy that requires no tracking of volatility factors. Numerical study is conducted to demonstrate the practical use of theoretical results and to draw economic interpretations from the robust decision rules. Accepted version 2016-06-21T07:09:00Z 2019-12-06T14:29:38Z 2016-06-21T07:09:00Z 2019-12-06T14:29:38Z 2015 2015 Journal Article Pun, C. S., & Wong, H. Y. (2015). Robust investment–reinsurance optimization with multiscale stochastic volatility. Insurance: Mathematics and Economics, 62, 245-256. 0167-6687 https://hdl.handle.net/10356/81380 http://hdl.handle.net/10220/40731 10.1016/j.insmatheco.2015.03.030 194822 en Insurance: Mathematics and Economics © 2015 Elsevier. This is the author created version of a work that has been peer reviewed and accepted for publication by Insurance: Mathematics and Economics, Elsevier. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.insmatheco.2015.03.030]. application/pdf |
| spellingShingle | Investment and reinsurance Mixture of power utilities Hamilton–Jacobi–Bellman–Isaacs equation Multiscale stochastic volatility Perturbation methods Pun, Chi Seng Wong, Hoi Ying Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title | Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title_full | Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title_fullStr | Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title_full_unstemmed | Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title_short | Robust Investment-Reinsurance Optimization with Multiscale Stochastic Volatility |
| title_sort | robust investment reinsurance optimization with multiscale stochastic volatility |
| topic | Investment and reinsurance Mixture of power utilities Hamilton–Jacobi–Bellman–Isaacs equation Multiscale stochastic volatility Perturbation methods |
| url | https://hdl.handle.net/10356/81380 http://hdl.handle.net/10220/40731 |
| work_keys_str_mv | AT punchiseng robustinvestmentreinsuranceoptimizationwithmultiscalestochasticvolatility AT wonghoiying robustinvestmentreinsuranceoptimizationwithmultiscalestochasticvolatility |