Abstract:

This paper incorporates quadratic transaction costs in the optimal risk control and investment problem for an insurer. Moreover, suppose that the insurance and financial markets are correlated. Under the dynamic mean-variance criterion, by solving a system of extended HJB equations, the equilibrium risk control and investment strategies and the corresponding value function are derived in terms of the solution to a system of matrix Riccati equations. Finally, the effects of transaction costs level and the market correlation coefficient on the equilibrium strategy and the efficient frontier are analyzed by some numerical examples. It turns out that the growth rate of investment slows down as the transaction costs level or the correlation coefficient increases, and the increase of transaction costs level will lead to the decrease of the efficient frontier.

Key words: Transaction costs, Market correlation, Risk control, Investment, Time consistency