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Correlation of Brownian Motions and Its Impact on a Reinsurer’s Optimal Investment Strategy and Reinsured Proportion under Exponential Utility Maximization and Constant Elasticity of Variance Model

DOI: 10.4236/oalib.1104954, PP. 1-10

Subject Areas: Ordinary Differential Equation, Financial Mathematics, Partial Differential Equation

Keywords: Correlation of Brownian Motions, Investment Strategy, Reinsured Proportion, Exponential Utility Constant Elasticity of Variance, Hamilton-Jacobi-Bellman Equation

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Abstract

This work investigated a reinsurer’s optimal investment strategy and the pro-portion he accepted for reinsurance under proportional reinsurance and expo-nential utility preference in the cases where the Brownian motions were corre-lated and where they did not correlate. The reinsurer invested in a market in which the price process of the risky asset is governed by constant elasticity of variance (CEV) model. The required Hamilton-Jacobi-Bellman Equations (HJB) were derived using the Ito’s lemma from which the optimal investment strategy and reinsured proportion were calculated. Also investigated were the implications of the correlation coefficient.

Cite this paper

Ihedioha, S. A. (2018). Correlation of Brownian Motions and Its Impact on a Reinsurer’s Optimal Investment Strategy and Reinsured Proportion under Exponential Utility Maximization and Constant Elasticity of Variance Model. Open Access Library Journal, 5, e4954. doi: http://dx.doi.org/10.4236/oalib.1104954.

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