TITLE:
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
AUTHORS:
Silas A. Ihedioha
KEYWORDS:
Correlation of Brownian Motions, Investment Strategy, Reinsured Proportion, Exponential Utility Constant Elasticity of Variance, Hamilton-Jacobi-Bellman Equation
JOURNAL NAME:
Open Access Library Journal,
Vol.5 No.10,
October
30,
2018
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.