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Optimal investment and reinsurance strategies under 4/2 stochastic volatility model

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  • Wenyuan Wang
  • Dmitry Muravey
  • Yang Shen
  • Yan Zeng

Abstract

This paper studies a mean-variance investment-reinsurance problem under a new stochastic volatility model, namely the 4/2 stochastic volatility model. Solving this problem requires a deep understanding of a class of parabolic partial differential equations (PPDEs). By the parametrix method and the integral transform method, we derive explicit solutions to the PPDEs in several special cases. Through the Lie symmetry analysis, we obtain a four-parameter family of the 4/2 stochastic volatility models such that the corresponding PPDEs have closed-form solutions. The efficient strategy and the efficient frontier of the mean-variance problem are represented by using the closed-form solutions to PPDEs. Numerical examples for the obtained efficient frontier are provided by Monto Carlo method.

Suggested Citation

  • Wenyuan Wang & Dmitry Muravey & Yang Shen & Yan Zeng, 2023. "Optimal investment and reinsurance strategies under 4/2 stochastic volatility model," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2023(5), pages 413-449, May.
    • Handle: RePEc:taf:sactxx:v:2023:y:2023:i:5:p:413-449
    DOI: 10.1080/03461238.2022.2108335
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    Cited by:

    1. Yang, Yang & Wang, Guojing & Yao, Jing, 2024. "Time-consistent reinsurance-investment games for multiple mean-variance insurers with mispricing and default risks," Insurance: Mathematics and Economics, Elsevier, vol. 114(C), pages 79-107.
    2. Aiqin Ma & Cuiyun Zhang & Yubing Wang, 2023. "Optimal Consumption and Investment Problem under 4/2-CIR Stochastic Hybrid Model," Mathematics, MDPI, vol. 11(17), pages 1-19, August.

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