Optimal Consumption and Investment with Insurer Default Risk
Posted: 14 Jul 2008 Last revised: 12 May 2019
Date Written: November 5, 2013
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
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