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Optimal Asset-Liability Management for an Insurer Under Markov Regime Switching Jump-Diffusion Market

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  • Jun Yu

    ()

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    This paper considers an asset-liability management problem under a continuous time Markov regime-switching jump-diffusion market. We assume that the risky stock’s price is governed by a Markov regime-switching jump-diffusion process and the insurance claims follow a Markov regime-switching compound poisson process. Using the Markowitz mean-variance criterion, the objective is to minimize the variance of the insurer’s terminal wealth, given an expected terminal wealth. We get the optimal investment policy. At the same time, we also derive the mean-variance efficient frontier by using the Lagrange multiplier method and stochastic linear-quadratic control technique. Copyright Springer Japan 2014

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    File URL: http://hdl.handle.net/10.1007/s10690-014-9187-6
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    Article provided by Springer & Japanese Association of Financial Economics and Engineering in its journal Asia-Pacific Financial Markets.

    Volume (Year): 21 (2014)
    Issue (Month): 4 (November)
    Pages: 317-330

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    Handle: RePEc:kap:apfinm:v:21:y:2014:i:4:p:317-330
    DOI: 10.1007/s10690-014-9187-6
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    1. Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
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    7. Chen, Ping & Yang, Hailiang & Yin, George, 2008. "Markowitz's mean-variance asset-liability management with regime switching: A continuous-time model," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 456-465, December.
    8. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    9. Yao, Haixiang & Lai, Yongzeng & Li, Yong, 2013. "Continuous-time mean–variance asset–liability management with endogenous liabilities," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 6-17.
    10. Chiu, Mei Choi & Li, Duan, 2006. "Asset and liability management under a continuous-time mean-variance optimization framework," Insurance: Mathematics and Economics, Elsevier, vol. 39(3), pages 330-355, December.
    11. Robert Elliott & Carlton-James Osakwe, 2006. "Option Pricing for Pure Jump Processes with Markov Switching Compensators," Finance and Stochastics, Springer, vol. 10(2), pages 250-275, April.
    12. Chiu, Mei Choi & Wong, Hoi Ying, 2012. "Mean–variance asset–liability management: Cointegrated assets and insurance liability," European Journal of Operational Research, Elsevier, vol. 223(3), pages 785-793.
    13. Robert J. Elliott & Tak Kuen Siu, 2013. "Option Pricing and Filtering with Hidden Markov-Modulated Pure-Jump Processes," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(1), pages 1-25, March.
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