Optimal Consumption and Insurance: A Continuous-Time Markov Chain Approach

21 Pages Posted: 21 Feb 2006

See all articles by Holger Kraft

Holger Kraft

Goethe University Frankfurt

Mogens Steffensen

University of Copenhagen

Date Written: February 14, 2006

Abstract

Decision problems about consumption and insurance are modelled in a continuous time multistate Markovian framework. The optimal solution is derived and studied. The model, the problem, and its solution are exemplified by two special cases: In one model the individual takes optimal positions against the risk of dying; in another model the individual takes optimal positions against the risk of loosing income as consequence of disability or unemployment.

Keywords: Life insurance mathematics, Multi-state model, stochastic control, mortality, disability, unemployment risk

JEL Classification: G11, G22, J65

Suggested Citation

Kraft, Holger and Steffensen, Mogens, Optimal Consumption and Insurance: A Continuous-Time Markov Chain Approach (February 14, 2006). Available at SSRN: https://ssrn.com/abstract=883674 or http://dx.doi.org/10.2139/ssrn.883674

Holger Kraft

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Mogens Steffensen (Contact Author)

University of Copenhagen ( email )

Universitetsparken 5
DK-2100 Copenhagen
Denmark

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