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Optimal consumption, investment, and insurance under state-dependent risk aversion

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  • Steffensen, Mogens
  • Søe, Julie Bjørner

Abstract

We formalize a consumption–investment–insurance problem with the distinction of a state-dependent relative risk aversion. The state dependence refers to the state of the finite state Markov chain that also formalizes insurable risks such as health and lifetime uncertainty. We derive and analyze the implicit solution to the problem, compare it with special cases in the literature, and illustrate the range of results in a disability model where the relative risk aversion is preserved, decreases, or increases upon disability.

Suggested Citation

  • Steffensen, Mogens & Søe, Julie Bjørner, 2023. "Optimal consumption, investment, and insurance under state-dependent risk aversion," ASTIN Bulletin, Cambridge University Press, vol. 53(1), pages 104-128, January.
    • Handle: RePEc:cup:astinb:v:53:y:2023:i:1:p:104-128_6
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