OPTIMAL PORTFOLIO SELECTION WITH LIFE INSURANCE UNDER SUBJECTIVE SURVIVAL BELIEF AND HABIT FORMATION

Shi, Ailing1,2; Li, Xingyi3; Li, Zhongfei4

2022-04-01

10.3934/jimo.2022051

Journal of Industrial and Management Optimization   影响因子和分区

1547-5816

1553-166X

This paper studies the optimal consumption, investment, and life insurance choices for a wage earner with subjective survival beliefs and habit formation types. The wage-earner has access to a risk-free asset, an index bond, and a stock in a financial market. Introducing subjective survival beliefs describes the wage earner's optimistic or pessimistic attitude towards the longevity risk. Two types of habit formation are considered: one depends on real past consumption; the other is incited by money illusion and depends on nominal past consumption. The aim is to maximize the expected utility of real consumption, total legacy, and terminal wealth, where the utility of consumption comes from the part of real consumption that exceeds real habit level. Using the dynamic programming method, we provide and prove a verification theorem and obtain the closed-form solution of the optimization problem. Numerical results reveal that subjective survival beliefs and habit formation types play important roles in the financial behaviors of the wage-earner. Detailed results are exhibited. Especially, subjective survival beliefs, the existence of habit formation, and the relative risk aversion coefficient affect the demand for life insurance.

  Habit formation subjective survival belief inflation risk optimal strategies consumption life insurance

SCI ; EI

英语

通讯

National Natural Science Foundation of China[71721001,71991474]

Engineering ; Operations Research & Management Science ; Mathematics

Engineering, Multidisciplinary ; Operations Research & Management Science ; Mathematics, Interdisciplinary Applications

WOS:000780900500001

AMER INST MATHEMATICAL SCIENCES-AIMS

20231213752255

Dynamic programming ; Financial markets ; Insurance ; Investments

Personnel:912.4 ; Optimization Techniques:921.5

Web of Science

1.Lanzhou Univ, Sch Math & Stat, Lanzhou 730000, Peoples R China
2.Lanzhou Univ Arts & Sci, Sch Educ, Lanzhou 730000, Peoples R China
3.Sun Yat Sen Univ, Sch Business, Guangzhou 510275, Peoples R China
4.Southern Univ Sci & Technol, Business Sch, Dept Finance, Shenzhen 518055, Peoples R China

Shi, Ailing,Li, Xingyi,Li, Zhongfei. OPTIMAL PORTFOLIO SELECTION WITH LIFE INSURANCE UNDER SUBJECTIVE SURVIVAL BELIEF AND HABIT FORMATION[J]. Journal of Industrial and Management Optimization,2022,19(4):2464-2484.

Shi, Ailing,Li, Xingyi,&Li, Zhongfei.(2022).OPTIMAL PORTFOLIO SELECTION WITH LIFE INSURANCE UNDER SUBJECTIVE SURVIVAL BELIEF AND HABIT FORMATION.Journal of Industrial and Management Optimization,19(4),2464-2484.

Shi, Ailing,et al."OPTIMAL PORTFOLIO SELECTION WITH LIFE INSURANCE UNDER SUBJECTIVE SURVIVAL BELIEF AND HABIT FORMATION".Journal of Industrial and Management Optimization 19.4(2022):2464-2484.