Dynamic Portfolio Choice with Stochastic Wage and Life Insurance

20 Pages Posted: 4 Aug 2012 Last revised: 18 Nov 2015

See all articles by Xudong Zeng

Xudong Zeng

Shanghai University of Finance and Economics, School of Finance

Yuling Wang

Shanghai University of Finance and Economics

James M. Carson

University of Georgia

Date Written: August 3, 2012

Abstract

We study optimal insurance, consumption and portfolio choice in a framework where a family purchases life insurance to protect the loss of the wage earner's human capital. Explicit solutions are obtained by employing CARA utility functions. We show that the optimal life insurance purchase is not a monotonic function of the correlation between the wage and the financial market. Meanwhile, the life insurance is explicitly affected by the family’s risk preferences in general. The model also predicts that a family uses the life insurance and the investment together to hedge the risk from the stochastic wage.

Keywords: Life insurance, portfolio choice, asset allocation, HJB equation, stochastic control

JEL Classification: D91, G11

Suggested Citation

Zeng, Xudong and Wang, Yuling and Carson, James M., Dynamic Portfolio Choice with Stochastic Wage and Life Insurance (August 3, 2012). Available at SSRN: https://ssrn.com/abstract=2123139 or http://dx.doi.org/10.2139/ssrn.2123139

Xudong Zeng (Contact Author)

Shanghai University of Finance and Economics, School of Finance ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Yuling Wang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

James M. Carson

University of Georgia ( email )

Athens, GA 30602-6254
United States

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