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Optimal Life Insurance and Annuity Demand with Jump Diffusion and Regime Switching

In: Advances in Econometrics, Operational Research, Data Science and Actuarial Studies

Author

Listed:
  • Jinhui Zhang

    (Macquarie University)

  • Sachi Purcal

    (East China Normal University)

  • Jiaqin Wei

    (East China Normal University)

Abstract

Classic Merton optimal life-cycle portfolio and consumption models are based on diffusion models for risky assets. In this paper, we extend the Richard’s (1975) optimal life-cycle model by allowing jumps and regime switching in the diffusion of risky assets. We develop a system of paired Hamilton–Jacobi–Bellman (HJB) equations. Using numerical methods, we obtain the results of agents’ behaviour. Our findings are that agents would be more conservative in consumption and annuitisation when the economic environment is more volatile and the bequest motive is stronger. However, under certain conditions, agents might increase their exposure to risky assets.

Suggested Citation

  • Jinhui Zhang & Sachi Purcal & Jiaqin Wei, 2022. "Optimal Life Insurance and Annuity Demand with Jump Diffusion and Regime Switching," Contributions to Economics, in: M. Kenan Terzioğlu (ed.), Advances in Econometrics, Operational Research, Data Science and Actuarial Studies, pages 515-530, Springer.
    • Handle: RePEc:spr:conchp:978-3-030-85254-2_31
    DOI: 10.1007/978-3-030-85254-2_31
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