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Optimal investment strategies for participating contracts

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  • Lin, Hongcan
  • Saunders, David
  • Weng, Chengguo

Abstract

Participating contracts are popular insurance policies, in which the payoff to a policyholder is linked to the performance of a portfolio managed by the insurer. We consider the portfolio selection problem of an insurer that offers participating contracts and has an S-shaped utility function. Applying the martingale approach, closed-form solutions are obtained. The resulting optimal strategies are compared with portfolio insurance hedging strategies (CPPI and OBPI). We also study numerical solutions of the portfolio selection problem with constraints on the portfolio weights.

Suggested Citation

  • Lin, Hongcan & Saunders, David & Weng, Chengguo, 2017. "Optimal investment strategies for participating contracts," Insurance: Mathematics and Economics, Elsevier, vol. 73(C), pages 137-155.
    • Handle: RePEc:eee:insuma:v:73:y:2017:i:c:p:137-155
    DOI: 10.1016/j.insmatheco.2017.02.001
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    References listed on IDEAS

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    Cited by:

    1. Dong, Yinghui & Zheng, Harry, 2019. "Optimal investment of DC pension plan under short-selling constraints and portfolio insurance," Insurance: Mathematics and Economics, Elsevier, vol. 85(C), pages 47-59.
    2. Felix Fie{ss}inger & Mitja Stadje, 2024. "Mean-Variance Optimization for Participating Life Insurance Contracts," Papers 2407.11761, arXiv.org, revised Dec 2024.
    3. Thai Nguyen & Mitja Stadje, 2018. "Optimal investment for participating insurance contracts under VaR-Regulation," Papers 1805.09068, arXiv.org, revised Jul 2019.
    4. Ankush Agarwal & Christian-Oliver Ewald & Yongjie Wang, 2023. "Hedging longevity risk in defined contribution pension schemes," Computational Management Science, Springer, vol. 20(1), pages 1-34, December.
    5. Emilio Barucci & Daniele Marazzina & Elisa Mastrogiacomo, 2021. "Optimal investment strategies with a minimum performance constraint," Annals of Operations Research, Springer, vol. 299(1), pages 215-239, April.
    6. Guohui Guan & Zongxia Liang & Yi xia, 2021. "Optimal management of DC pension fund under relative performance ratio and VaR constraint," Papers 2103.04352, arXiv.org.
    7. Chen, An & Hieber, Peter & Nguyen, Thai, 2019. "Constrained non-concave utility maximization: An application to life insurance contracts with guarantees," European Journal of Operational Research, Elsevier, vol. 273(3), pages 1119-1135.
    8. Hongcan Lin & David Saunders & Chengguo Weng, 2019. "Portfolio Optimization With Performance Ratios," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(05), pages 1-38, August.
    9. Zongxia Liang & Yang Liu & Ming Ma & Rahul Pothi Vinoth, 2021. "A Unified Formula of the Optimal Portfolio for Piecewise Hyperbolic Absolute Risk Aversion Utilities," Papers 2107.06460, arXiv.org, revised Oct 2023.
    10. Guan, Guohui & Liang, Zongxia & Xia, Yi, 2023. "Optimal management of DC pension fund under the relative performance ratio and VaR constraint," European Journal of Operational Research, Elsevier, vol. 305(2), pages 868-886.
    11. Chen, An & Stadje, Mitja & Zhang, Fangyuan, 2024. "On the equivalence between Value-at-Risk- and Expected Shortfall-based risk measures in non-concave optimization," Insurance: Mathematics and Economics, Elsevier, vol. 117(C), pages 114-129.
    12. Anne MacKay & Adriana Ocejo, 2022. "Portfolio Optimization With a Guaranteed Minimum Maturity Benefit and Risk-Adjusted Fees," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 1021-1049, June.
    13. Christian Dehm & Thai Nguyen & Mitja Stadje, 2020. "Non-concave expected utility optimization with uncertain time horizon," Papers 2005.13831, arXiv.org, revised Oct 2021.

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    More about this item

    Keywords

    Participating contract; Utility maximization; Martingale and dual approach; Concavification technique; Stochastic control;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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