Optimal Consumption and Investment with Insurer Default Risk

Posted: 14 Jul 2008 Last revised: 12 May 2019

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Hyeng Keun Koo

Ajou University

Seyoung Park

Nottingham University Business School

Date Written: November 5, 2013

Abstract

We solve the optimal consumption and investment problem in an incomplete market, where borrowing constraints and insurer default risk are considered jointly. We derive in closed-form the optimal consumption and investment strategies. We find two main results with quantitative analysis. On the one hand, the proportion of wealth invested in stocks could increase (decrease) as insurer default risk increases when wealth is low (high). On the other hand, the voluntary annuity demand could increase (decrease) as risk aversion increases when insurer default risk is small (large).

Keywords: optimal consumption, optimal investment, insurer default risk, annuity demand

JEL Classification: C61, E21, G11

Suggested Citation

Jang, Bong-Gyu and Koo, Hyeng Keun Keun and Park, Seyoung, Optimal Consumption and Investment with Insurer Default Risk (November 5, 2013). Insurance: Mathematics and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1159678 or http://dx.doi.org/10.2139/ssrn.1159678

Bong-Gyu Jang (Contact Author)

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Hyeng Keun Keun Koo

Ajou University ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)
82-31-219-2706 (Phone)
82-31-219-1616 (Fax)

Seyoung Park

Nottingham University Business School ( email )

Nottingham University Business School
Jubilee Campus
Nottingham
United Kingdom
+44-7927-494518 (Phone)

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