Journal of the Korean Society for Industrial and Applied Mathematics

Korean Society for Industrial and Applied Mathematics (한국산업응용수학회)
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OPTIMAL CONSUMPTION/INVESTMENT AND LIFE INSURANCE WITH REGIME-SWITCHING FINANCIAL MARKET PARAMETERS

  • LEE, SANG IL (DEPARTMENT OF FINANCIAL ENGINEERING, AJOU UNIVERSITY) ;
  • SHIM, GYOOCHEOL (DEPARTMENT OF FINANCIAL ENGINEERING, AJOU UNIVERSITY)
  • Received : 2015.05.28
  • Accepted : 2015.07.24
  • Published : 2015.12.25
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Abstract

We study optimal consumption/investment and life insurance purchase rules for a wage earner with mortality risk under regime-switching financial market conditions, in a continuous time-horizon. We apply the Markov chain approximation method and suggest an efficient algorithm using parallel computing to solve the simultaneous Hamilton-Jaccobi-Bellman equations arising from the optimization problem. We provide numerical results under the utility functions of the constant relative risk aversion type, with which we illustrate the effects of regime switching on the optimal policies by comparing them with those in the absence of regime switching.

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References

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