Ítem
Acceso Abierto
Optimal investment with insurable background risk and nonlinear portfolio allocation frictions
Título de la revista
Autores
Ramírez, H
Serrano, R
Fecha
2023-03-09
Directores
ISSN de la revista
Título del volumen
Editor
Universidad del Rosario
Citations
Métricas alternativas
Resumen
Abstract
We study investment and insurance demand decisions for an agent in a theoretical continuous-time expected utility maximization model that combines risky assets with an (exogenous) insurable background risk. This risk takes the form of a jump-diffusion process with negative jumps in the return rate of the (self-financed) wealth. The main distinctive feature of our model is that the agent’s decision on portfolio choice and insurance demand causes nonlinear friction in the dynamics of the wealth process. We use the dynamic programming approach to find optimality conditions under which the agent assumes the insurable risk entirely, or partially, or purchases total insurance against it. In particular, we consider differential and piece-wise linear portfolio allocation frictions, with differential borrowing and lending rates as our most emblematic example. Finally, we present a mutual-fund separation result and illustrate our results with several numerical examples when the adverse jump risk has Beta distribution.
Palabras clave
Keywords
Portfolio allocation , Insurance demand , CRRA utility , Background risk , Jump-diffusions , Dynamic programming , Differential rates , Fund separation Theorem
Citations
