Journal
JOURNAL OF BANKING & FINANCE
Volume 31, Issue 5, Pages 1307-1319Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jbankfin.2006.10.015
Keywords
life insurance; investment/consumption model; HJB equation; CRRA utilities
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In this paper, we consider optimal insurance and consumption rules for a wage earner whose lifetime is random. The wage earner is endowed with an initial wealth, and he also receives an income continuously, but this may be terminated by the wage earner's premature death. We use dynamic programming to analyze this problem and derive the optimal insurance and consumption rules. Explicit solutions are found for the family of CRRA utilities, and the demand for life insurance is studied by examining our solutions and doing numerical experiments. (c) 2006 Elsevier B.V. All rights reserved.
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