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Dynamic Portfolio Choice with Stochastic Wage and Life Insurance

Author

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  • Xudong Zeng
  • Yuling Wang
  • James M. Carson

Abstract

We study optimal insurance, consumption, and portfolio choice in a framework where a family purchases life insurance to protect the loss of the wage earner's human capital. Explicit solutions are obtained by employing constant absolute risk aversion utility functions. We show that the optimal life insurance purchase is not a monotonic function of the correlation between the wage and the financial market. Meanwhile, the life insurance decision is explicitly affected by the family's risk preferences in general. The model also predicts that a family uses life insurance and investment portfolio choice to hedge stochastic wage risk.

Suggested Citation

  • Xudong Zeng & Yuling Wang & James M. Carson, 2015. "Dynamic Portfolio Choice with Stochastic Wage and Life Insurance," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(4), pages 256-272, October.
    • Handle: RePEc:taf:uaajxx:v:19:y:2015:i:4:p:256-272
    DOI: 10.1080/10920277.2015.1041987
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    Citations

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    Cited by:

    1. Liang, Xiaoqing & Young, Virginia R., 2018. "Annuitization and asset allocation under exponential utility," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 167-183.
    2. Peng, Xingchun & Li, Baihui, 2023. "Optimal investment, consumption and life insurance purchase with learning about return predictability," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 70-95.
    3. Liu, Guo & Jin, Zhuo & Li, Shuanming, 2021. "Household Lifetime Strategies under a Self-Contagious Market," European Journal of Operational Research, Elsevier, vol. 288(3), pages 935-952.
    4. Liu, Guo & Jin, Zhuo & Li, Shuanming, 2021. "Optimal investment, consumption, and life insurance strategies under a mutual-exciting contagious market," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 508-524.
    5. Yang Wang & Jianwei Lin & Dandan Chen & Jizhou Zhang, 2023. "Optimal Investment–Consumption–Insurance Problem of a Family with Stochastic Income under the Exponential O-U Model," Mathematics, MDPI, vol. 11(19), pages 1-19, October.

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