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Optimal Consumption and Insurance: A Continuous-time Markov Chain Approach

Published online by Cambridge University Press:  17 April 2015

Holger Kraft  and
Mogens Steffensen
Holger Kraft
Affiliation:
Finance Department, Goethe University, D-60054 Frankfurt am Main, Germany, E-Mail: kraft@finance.uni-frankfurt.de
Mogens Steffensen
Affiliation:
University of Copenhagen, Department of Mathematical Sciences, Universitetsparken 5, Copenhagen O
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Abstract

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Personal financial decision making plays an important role in modern finance. Decision problems about consumption and insurance are in this article modelled in a continuous-time multi-state Markovian framework. The optimal solution is derived and studied. The model, the problem, and its solution are exemplified by two special cases: In one model the individual takes optimal positions against the risk of dying; in another model the individual takes optimal positions against the risk of losing income as a consequence of disability or unemployment.

Keywords

Personal financemulti-state modelstochastic controlfinancial decision makingmortality-disability-unemployment risk
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 38 , Issue 1 , May 2008 , pp. 231 - 257
Copyright
Copyright © ASTIN Bulletin 2008

Footnotes

*

Holger Kraft gratefully acknowledges financial support from Deutsche Forschungsgemeinschaft.

JEL-Classification: G11, G22, J65.

References

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