A Hybrid Estimate for the Finite-Time Ruin Probability in a Bivariate Autoregressive Risk Model with Application to Portfolio Optimization

Qihe Tang, Zhongyi Yuan

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

Consider a discrete-time risk model in which the insurer is allowed to invest a proportion of its wealth in a risky stock and keep the rest in a risk-free bond. Assume that the claim amounts within individual periods follow an autoregressive process with heavy-tailed innovations and that the log-returns of the stock follow another auto regressive process, independent of the former one. We derive an asymptotic formula for the finite-time ruin probability and propose a hybrid method, combining simulation with asymptotics, to compute this ruin probability more efficiently. As an application, we consider a portfolio optimization problem in which we determine the proportion invested in the risky stock that maximizes the expected terminal wealth subject to a constraint on the ruin probability.

Original languageEnglish (US)
Pages (from-to)378-397
Number of pages20
JournalNorth American Actuarial Journal
Volume16
Issue number3
DOIs
StatePublished - Jul 1 2012

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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