Applied Mathematics and Computation 259 (2015) 10301045

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Applied Mathematics and Computation

journal homepage: www.elsevier.com/locate/amc

Ruin probabilities and optimal investment when the stock price

follows an exponential Lvy process q
Ping Li a, Wu Zhao b,, Wei Zhou a
a
b

College of Computer Science and Technology, Southwest University for Nationalities, Chengdu 610054, Sichuan, PR China
School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 610054, Sichuan, PR China

a r t i c l e

i n f o

Keywords:
Ruin probability
Exponential Lvy process
Exponential martingale
Uniform integrable martingale
Value-at-Risk

a b s t r a c t
This paper investigates the innite and nite time ruin probability under the condition that
the company is allowed to invest a certain amount of money in some stock market, and the
remaining reserve in the bond with constant interest force. The total insurance claim
amount is modeled by a compound Poisson process and the price of the risky asset follows
a general exponential Lvy process. Exponential type upper bounds for the ultimate ruin
probability are derived when the investment is a xed constant, which can be calculated
explicitly. This constant investment strategy yields the optimal asymptotic decay of the
ruin probability under some mild assumptions. Finally, we provide an approximation of
the optimal investment strategy, which maximizes the expected wealth of the insurance
company under a risk constraint on the Value-at-Risk.
2015 Published by Elsevier Inc.

1. Introduction
With the development of nancial products the risky investment of an insurer plays a more and more important role for
the insurers success. Hence, how to model the effects of an insurers risky investment on the insurer has become a more and
more popular topic. Consequently, a lot of researchers pay attention to the study the ruin probability with the insurer having
the opportunity to invest in a risky asset, usually modeled by a geometric Brownian motion. In this setting, Frolova et al. [5]
show that when the claims are exponentially distributed, the ruin probability is either 1 for all initial capital reserves or
decreases asymptotically for large initial capital like a negative power function and it depends on the model parameters.
Paulsen and Gjessing [17] and Kalashnikov and Norberg [12] obtain this result even in the case of claim sizes with
exponential moments.
One frequently considered optimization problem is: what is the minimal ruin probability the insurer can obtain and how
much he can invest in the risky asset in order to get the minimal ruin probability. This problem is proposed by Browne [2],
who obtains an optimal investment strategy consisting of holding a constant amount of wealth in the risky asset, under the
assumption that the investment risk process follows a Brownian motion (the so-called diffusion approximation). Hipp and
Plum [11] investigate the general problem with the compound Poisson process for an insurance risk model and geometric
Brownian motion for a risky asset model. They derive the corresponding HamiltonJacobiBellman (HJB) equation for the

q
This paper was supported by the Fundamental Research Funds for the Education Department of Sichuan Province (Grant No. 15ZB0488) and Innovation
Teams (Grant No. 14CXTD03). It is also supported by the National Science Foundation of China (Projects Nos: 71001017 and 61105061).
Corresponding author.
E-mail address: zhaowu@uestc.edu.cn (W. Zhao).

http://dx.doi.org/10.1016/j.amc.2014.12.042
0096-3003/ 2015 Published by Elsevier Inc.

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

maximal survival probability and prove the existence of a solution. Gaier et al. [6] show that in the case of exponential claims
there exist constants ^r; C and an investment strategy, which holds a xed amount of wealth invested in the risky asset, such
that for the minimal probability of ruin wx,
^

wx 6 Cerx ;

where ^r is the positive solution of the equation:

khr cr

a2
2b

where drift a and volatility b are constants.It is easy to get that ^r is greater than the classical Lundberg exponent. Then they
show a surprising result that if the insurer holds a xed amount of wealth invested in the risky asset, independent of the
current reserve, then it will yield the optimal asymptotic decay of the ruin probability.
But an important issue is whether the geometric Brownian motion describes the development of the risky assets prices
appropriately or not. In fact, the sudden downward (upward) jumps of many stocks prices cannot be explained by the
continuous geometric Brownian motion. One way to handle this problem is to model the price of the risky asset by a more
general exponential Lvy process with jumps. Paulsen and Gjessing [17] investigate the asymptotic behavior for large initial
capital of the innite time ruin probability when the investment process is a general exponential Lvy process. The results
indicate that the ruin probability behaves like a Pareto function of the initial capital.Under the assumption that the reserve is
invested in a stochastic interest process which is a Lvy process, Cai [3] studies ruin probabilities and penalty functions, and
he constructs an integro-differential equation for this model. [14] investigates the optimal investment strategy, which
maximizes the expected wealth of the insurance company under a risk constraint on the Value-at-Risk. However, the
portfolio given by [14] is self-nancing, where borrowing and short selling are forbidden. Kostadinova [10] investigate
the nite time ruin probabilities for the Poisson risk model with an exponential Lvy process investment return and heavy
tailed claims, and they obtain the asymptotic evaluation of ruin probability of nite time ruin probabilities.
The remaining part of this paper consists of four sections. We start with the construction of model and some notations in
Section 2. In Section 3, we assume that the stock price follows an exponential Lvy process, we consider the framework of a
classical ruin process, where the claims have exponential moments. Different from the self-nancing strategy of Kostadinova
[14], the strategy in our model is not budget constrained. By using the approach of exponential martingale and we obtain the
similar result as Gaier et al. [6] for the minimal ruin probability. Section 4, developed by Gaier et al. [6], and by taking the
advantage of the results of Section 3, we show that the constant investment is asymptotically optimal under some mild
assumptions. In Section 5, using the results in Heyde and Wang [10], we obtain the optimal strategy when the strategy is
restricted to the mix strategy.
2. The model
Our model is built on a probability space X; F ; P. For the risk process R of the insurer, we use the following model:

Rt; u u ct 

Nt
X
Xn;

n1

where u P 0 is the initial reserve of the insurer. c > 0 is the premium rate over time. X n , which denotes the size of nth claim,
n 1; 2; . . ., constitutes a sequence of independent and identically distributed (i.i.d.) and non-negative random variables
with a generic random variable X and a common distribution function (d.f.) F X x, and N fNtgtP0 is a homogeneous
Poisson process with intensity k and independent of fX n gn2N .
Now we set up the insurance risk model which will be discussed in the paper. Assume that the insurer may also invest in
a stock or market index, modeled by an exponential Lvy process, and the stock price process is presented as follows

St eLt ;

t P 0:

The process L fLtgtP0 with L0 0 is a Lvy process with characteristic triplet c; r ; m and characteristic exponent
2

W. The characteristic function of Lt has the form, EeisLt  etWs ; s 2 R, where W is given by the LvyKhintchine formula
Z 1
 isx

r2
Ws isc  s2
e  1  isxIfjxj61g mdx;
5
2
1
with c 2 R and r P 0. Here, IfAg is the indicator function of set A, and m is called Lvy measure on R n f0g satisfying mf0g 0
R 1 2
x ^ 1mdx < 1. Using It formula for semimartingales, we have
1

and



r2
dSt St dLt dt eDLt  1  DLt ;
2

where DLt; x Lt; x  Lt; x for each x 2 X denotes the jump of L at the moment t  0. Furthermore, let us assume
that the process St is independent of Rt; u, and denoted by F F t tP0 the usual ltration generated by the processes

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Rt; u and St. At the moment t if the insurer has wealth Ut, and invests an amount Kt of money in the stock and the
remaining reserve Ut  Kt in the bond with zero interest rate, the interest force on the bond is equal to the ination force.
The wealth process Ut can be written as

Ut; u; K u ct 
Z

Z
Nt
X
Xn

n1
t

Ks
dSt Rt; u
Ss

KsdLs

r2
2

ds eDLs  1  DLs : Rt; u

Ksd~Ls:

From Lemma A8 in Goll and Kallsen [8] (see also Proposition 2.2.8 in Kostadinova [14]) we can get that ~Lt is a Lvy process
~; r
~ given by
~ 2; m
with characteristic triplet c

c~ c
~2

r2
2

e x  1Ifje x 1j61g  xIfjxj61g

mdx

1

r r
m~A mfx 2 R : e x  1 2 Ag for any Borel set A:

We denote the Laplace exponent of the process L and ~

L by uy Wiy log Ee
~ is the characteristic exponent of ~L.
respectively, if they exist. W
~ y as
By (8) we obtain u

yL1

~
~ y yc
u

r~ 2

1

,



Z 1
 x

r2
~dx y c
eyx  1 yxIfjxj61g m

e  1Ifje x 1j61g  xIfjxj61g mdx

2
1

r2

r2

expfye x  1g  1 ye x  1Ifje x 1j61g mdx yc  y y2

2
2
2
1
Z 1
Z 1
x

expfye  1g  1mdx
yxIfjxj61g mdx:

y2

~ iy log Ee
~ y W
 and u

y~
L1

1

1

~ y < 1, then EeyLt  exptu

~ y < 1 for all t P 0, see Theorem 25.17 in [19].
If u
The set K of admissible strategies K is dened as

K , D fKttP0 : Ktis adapted and cadlag

Rt
Note that K 2 K is sufcient for the stochastic integral 0 Ksd~Ls w.r.t. the Lvy process ~Ls to be well dened. If Kt  A
for all t 2 0; 1, where A is a some constant, we call the strategy constant investment strategy. For later use, we introduce
the following process for xed numbers u; r 2 R and a xed admissible strategy K 2 K : Mt; u; K; r : erUt;u;K . This
exponential process is often used in risk theory, for example, Gerber and Gaier et al. [7,6].
In Section 3, we investigate the innite time ruin probability, which is dened by

wu; K PfUt; u; K < 0; for some t P 0g;

depending on the initial wealth u and the investment strategy K of insurer. We further dene the time of ruin,

s : su; K infft : Ut; u; K < 0g:

Then

wu; K Ps < 1:
Furthermore, we dene

w u inf wu; K:
K2K

If this inmum is attained for a certain strategy K  , we will call this strategy an optimal strategy with respect to the initial
reserve u.
At the end of this section, we denote by h : R ! R the moment generating function of claim size X, shifted such that
h0 0,

hr M X r  1 EerX   1:
We will make the classical assumption that there exists r1 2 0; 1 such that hr ! 1, for r " r1 . Clearly, the function h is
increasing, convex, and continuous on 0; r1 .

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

1033

3. The main results

Let Kt  0 in the model described in Section 2. Then the model becomes the classical CramrLundberg model and the
corresponding ruin probability with exponential claims can be bounded from above by e^ru , where ^r is the positive solution
of the equation:

khr cr:
^r is called Lundberg coefcient. In the model with the investment risk process described by geometric Brownian motion and
constant investment strategies [6] obtain (1) and the largest Lundberg coefcient ^r from (2).
In this section we still adopt the classical assumption that positive net prot condition holds, namely EX < kc, and only
consider the constant investment strategies, namely, Kt  A, where A is some xed constant, hence from the model
described in Section 2 we can get the following equation that the Lundberg coefcient r satises:

~ y;
khr cr  u
~ y (similar to the proof of the following Lemma 3.3 we can derive the above equation;
where we assume the existence of u
~ y, please see Lemma 3.2.)
as for the discussion of the existence of u
^ such that
From Fig. 1, we can see that if we want to get the largest Lundberg coefcient, we have to look for the point y
^.
~ y takes its least value at the point y
u
First, we introduce the following notation:

Gy : c 

r2
2

xmdx r2 y 

1

e x  1 expfye x  1gmdx;

10

1

~ y. For later use, we let

which is the derivative of u

f :

e x  1  xtdx:

1

Notice that e x  1  x has the same order as x2 as x ! 0. Hence, by the assumption

R 1
1

x2 ^ 1mdx < 1, we get

f < 1:
In the following lemma we will discuss the properties of function Gy.
We need the condition that either r 0 or m 0 holds. The condition is quite natural for the risky market.
Lemma 3.1. Either r 0 or m 0 holds, then we can get that Gy is a strictly increasing, continuous and nite function for
y 2 y ; 1 and limy!1 Gy 1, where y : inffy : Gy < 1g 6 0. Moreover, if y > 1, then limy!y Gy Gy
and limy!y  Gy 1.

Proof. We write Gy as

Gy : c 

r2
2

 f r2 y 

e x  1expfye x  1g  Ijxj61 mdx:

1

At the beginning, we discuss the existence of limy!y0 Gy for any y0 2 R, we have

Fig. 1. Plot of Eq. (13).

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

lim Gy c 

r2

y!y0

 f r2 y0  lim

 limy!y0

y!y0

1

e x  1expfye x  1gmdx  lim

y!y0

1

e x  1expfye x  1gmdx

e x  1expfye x  1g  1mdx:

1

Now we treat the last term. Clearly, if y 0, then the integral of the last term is zero. If y 0, then
R 1
e x  1expfye x  1g  1 has the same order as yx2 as x ! 0. Hence, by the condition 1 x2 ^ 1mdx < 1 and
Dominated Convergence Theorem we obtain that for y 2 R,

lim

y!y0

e x  1expfye x  1g  1mdx

1

e x  1expfy0 e x  1g  1mdx < 1:

1

So the last term is nite. Next, we consider the other two limits.
Notice that for any xed x 6 1; e x  1 expfye x  1g is a decreasing and non-positive function with respect to y.
R 1
Clearly, the integrand e x  1 expfye x  1g is bounded for x 6 1. It follows from the condition 1 x2 ^ 1mdx < 1
and Dominated Convergence Theorem that

0 P lim

y!y0

1

e x  1 expfye x  1gmdx
1

1

e x  1 expfy0 e x  1gmdx > 1:

1

Now we turn to the last limit. For simplicity reason, denote

Jy :

e x  1 expfye x  1gmdx:

Notice that for any xed x P 1; e x  1 expfye x  1g is a decreasing and non-negative function with respect to y.
Moreover, we have that e x  1 expfye x  1g is bounded for x P 1 and y > 0. Hence, by the condition
R 1 2
x ^ 1mdx < 1 and Dominated Convergence Theorem we can get that for y0 > 0,
1

lim Jy Jy0 ;

y!y0

which is nite. These lead to y 6 0. Again notice that for any xed x P 1; e x  1 expfye x  1g is a decreasing and nonnegative function with respect to y. We only need to discuss the case y > 1. Clearly, by Dominated Convergence
Theorem we can get that for y0 > y ,

lim Jy Jy0 ;

y!y0

which is nite. Notice that Jy 1 for y < y 6 0. Hence, we can get that

lim Jy 1

y!y 

and by Monotone Convergence Theorem we have

lim Jy Jy :

y!y

Hence, from the discussion above and the denition of Gy, we can deduce that y 6 0; Gy is a continuous function in
y ; 1; limy!1 Gy 1, and if y > 1, then limy!y Gy Gy and limy!y  Gy 1.
On the other hand, for y 2 y ; 1,


dGy
r2
dy

e x  1 expfye x  1gmdx > 0;

1

which means that Gy is strictly increasing for y 2 y ; 1. It ends the proof of lemma. h
~ y is nite and strictly convex for y 2 y ; 1, and if y > 1, then u
~ y 1 for y < y ; if y 1, then
Lemma 3.2. u
^ such that u
~ y 1 and the equation Gy 0 has a unique solution. Furthermore, there exists a unique y
~ y arrives
limy!1 u
^ and 1 < u
^  0, and if the equation Gy 0 has a solution y , which is unique by Lemma 3.1, then
~ y
at its least value at y
^ y ; if the equation Gy 0 has no solution, then y
^ y .
y
~ y as:
Proof. In view of (9) we rewrite u

~ y yc  y
u

r2
2

r2
2

y2  fy

1

expye x  1  1 ye x  1Ifjxj61g

mdx:

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

1035

~ y, which can be decomposed into

Recall f < 1. Hence, it sufces to consider the integral in u

Z 1
Z 1
expye x  1  1 ye x  1Ifjxj61g mdx
expye x  1mdx
expye x  1  1
1
1
1
Z 1
Z
expye x  1mdx 
mdx:
ye x  1mdx
1

jxjP1

R1
Notice that expye  1  1 ye  1 has the same order as yx2 as x ! 0. Hence, by the condition 1 x2 ^ 1mdx < 1
we can get that the second and the last terms on the right side of the above formula are nite. Clearly, since the integrand is
R
bounded and jxjP1 mdx < 1, the rst term in the right side of the above formula is nite. We can get from the proof of
R1
R1
Lemma 3.1 that 1 e x  1 expy1 e x  1mdx < 1 for y1 > y , which means that 1 expy1 e x  1mdx < 1 for


~ y is nite for y 2 y ; 1.
y1 > y . Therefore we deduce that u
Applying (9) and Lemma 3.1 we obtain that for any y 2 y ; 1,
x

~ y @Gy
@2u

r2
@y2
@y

e x  1 expfye x  1gmdx > 0:

11

1

~ y is strictly convex in y 2 y ; 1.
Hence the function u
Let Hy expye x  1  1 ye x  1. Clearly,


dHy
e x  1 expye x  1 e x  1jy0 0
dy y0
and
2

d Hy
2

dy

e x  1 expye x  1 P 0:

Hence, for any xed x; Hy arrives at its least value at y 0. Noticing that H0 0 we get that Hy P 0 for all y. Therefore,
R1
Hydy P 0 and we can get
1

~ y P yc  y
u

r2
2

r2
2

y2  fy 

mdx ! 1 as y ! 1:

12

jxjP1

If y > 1, we can get from the proof of Lemma 3.1 that for y1 < y0 < y ,

e x  1 expy0 e x  1mdx 1;

which means that for y1 < y0 < y ,

expy1 e x  1mdx 1:

~ y 1 for 1 < y < y .

Therefore we deduce that u
Next we discuss the case y 1. Similar to (12), we can get that

~ y P yc  y
u

r2
2

r2
2

y2  fy 

mdx ! 1 as y ! 1:

13

jxjP1

Combining (11)(13) we get that there is a unique solution y such that Gy 0 as y 1.
~
If the equation Gy 0 has solution y > y , which is unique by Lemma 3.1, then by Lemma 3.1 and @ u@yy Gy we

have


~ y
@u

@y 

c 
yy

r2
2

1

xmdx r2 y 

e x  1 expfy e x  1gmdx 0:

14

1

^ y .
Hence, y
According to (12), (13) and Lemma 3.1 we can get that if y 1, then the equation Gy 0 has a unique solution
y > y . Hence, next we shall only discuss the case that the equation Gy 0 has a solution y y > 1, which is unique
by Lemma 3.1, or the equation Gy 0 has no solution. For the second case, we can get y > 1. If the equation Gy 0
has solution y y > 1 or the equation Gy 0 has no solution, then by Lemma 3.1 we can get that Gy > 0 for
y 2 y ; 1 and y > 1. By Lemma 3.1 and the above discussions we can get that for the two cases,

lim Gy Gy P 0:

y!y

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Let us recall the proof of Lemma 3.1 and get Jy < 1, which means that

expy e x  1mdx < 1:

~ y is nite. Therefore, for the two cases that the equation Gy 0 has solution
From the above discussions we know that u
~ y arrives its least
y y or the equation Gy 0 has no solution, in view of Gy > 0 for all y 2 y ; 1 we can get that u
value at y .
^ such that u
~ y arrives its least value at y
^. Hence, we derive that
In conclusion, we can get that there exists a y
^ 6 u
~ 0 0. h
~ y
u
^ 6 0; If EeL1  > 1, then y
^ > 0; If EeL1  1, then y
^ 0.
Corollary 3.1. If EeL1  < 1, then y
Proof. Notice that EeL1  eu1 eG0 . Hence, EeL1  < 1 implies G0 > 0. When G0 > 0, if y 0, then by Lemma 3.2
~ y arrives its least value at 0, which gives y
^ 0; if y < 0, then by Lemma 3.2 we can get y
^ < 0 as well.
we know that u
L1
L1
^ > 0. Ee  1 implies y
^ 0. h
Similarly, we can obtain that Ee  > 1 implies y
^ is non-negative. In fact, y < 0 is difcult to be satised. By the proof of Lemma
Remark 3.1. For most cases, y 0. Hence, y
R1
3.1, if y < y1 < 0, we have Gy1 > 1, or equivalently, Ly1  1 e x  1expfy1 e x  1gmdx < 1. As we all know it is
difcult to be satised, except for some special measure m, e.g. m has a nite support on R or m has a distribution with a
sufciently light tail.
Lemma 3.3. There exists a unique positive number ^r such that

^;
~ y
kh^r c^r  u

15

^
^y
^ ^r e^rUt;u;A
^ is dened in Lemma 3.2. Given the constant process Kt  A
^=^r , the process Mt; u; A;
where y
is a martingale
w.r.t. the ltration F.

~ y
^. By virtue of Lemma
Proof. At rst we show the existence and uniqueness of ^r in Eq. (15). Dene Hr : khr  cr u
^ 6 0. It can be easily checked that H0 u
^ 6 0 and H00 r > 0. Since the positive net prot condition
~ y
~ y
3.2, we have u
holds, it follows that H0 0 < 0. From the properties described above, we know that for the Eq. (15) there exists a unique positive solution.
^ has stationary independent increments. For arbitrary 0 6 s 6 t, we obtain
Notice that Ut; u; A
^
^
^
^
^
^
^ ^r jF s  Ee^rUt;u;A
EMt; u; A;
jF s  e^rUs;u;A Ee^rUt;u;AUs;u;A jF s  e^rUs;u;A Ee^rUts;0;A :
^
^r Ut;u;A

^ ^r is a martingale, we need to show Ee

In order to verify that the process Mt; u; A;

6 ^r
^
6
Ee^rUt;u;A  E6e
4

ct

Nt
X

^ ~Lt
X n A

n1

!3

Nt
X

7
6 ^r Xn 7
7
7
6
^
^^ ~
^
^
~ ^
7 erct E6e n1 7EerALt  erct ekhrt euyt 1;
5
5
4

16

 1. For any t P 0 we have

17

Remark 3.2. ^r given in Lemma 3.3 is the largest Lundberg coefcient for constant investment strategies, which will be
shown in the next Theorem. From Fig. 1 we know that in order to get the largest Lundberg coefcient ^r for constant invest^ is the maximum of function
~ y in (15). Lemma 3.2 shows that u
~ y
ment strategies, we need the largest positive shift u
^ in Eq. (15).
~ y. This is the reason why we choose y
u
With the help of the preceding lemmas we get the following result.
^ y^, the minimal ruin probability has upper bound e^ru for all u P 0, where
Theorem 3.1. For the constant investment strategy A
^r
^
^.
~ y
0 < r < r 1 is the positive solution of the equation kh^r c^r  u
^ ^r is a martingale. The stopped process Mt ^ s; u; A;
^ ^r is the
Proof. From Lemma 3.3 we know that the process Mt; u; A;
same case. Then

^ ^r
e^ru M0; u; A;
h
i
h
i
^ ^r Ifs<tg E Mt; u; A;
^ ^rIfsPtg
E Ms; u; A;
h
i
^ ^r Ifs<tg
P E Ms; u; A;

18

19

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

1037

^ ^r is nonnegative. Using Monotone Convergence Theorem we have

The inequality follows the fact that the process Mt; x; A;

h
i
h
i
^ ^rIfs<tg E Ms; u; A;
^ ^r Ifs<1g :
lim E Ms; u; A;

20

t!1

^ ^rjs < 1Ps < 1. For Ms; u; A;

^ ^r P 1 a.s., we arrive at
Hence e^ru P EMs; u; A;

^ Ps < 1 6 e^ru ;
Wu; A

21

which gives that for all u P 0,

^ 6 e^ru :
W u; A


2

Remark 3.3. With the characteristic triplet c; r2 ; m of Lt given by c a  b2 , r b, t  0, namely, the stock price
follows geometric Brownian motion dSt Stadt bdWt, our model comes to the model described by Gaier et al.

2
^ y a2 . Therefore u
~ y
^ u
~ a2  a22 and the Eq. (15) turns into
[6]. Hence, Gy a b y, and we can get y
2b
b
b
a2
a
^
^
khr cr 2b
2 , whose solution is denoted by r . Hence we can get A 2 ^. This is consistent with the outcome obtained by
b r

Gaier et al. [6].

^ 6 0. If u
^ < 0, we can drop the condition EX < kc (see [6, Fig. 2].)
~ y
~ y
Remark 3.4. Lemma 3.2 shows that u
^ 6 0, which means that the investment is non-positive,
Remark 3.5. From Corollary 1 we know that if EeL1  < 1, then y
namely the insurer should sell short the stock or not hold the stock. It can be explained as follows: condition EeL1  < 1,
equivalently, ES1 < S0, means that the expected price of the stock market at time 1 is lower than the initial price.
Therefore, the insurer would rather sell short or not hold the stock. On the contrary, if EeL1  > 1, which means that the
expected price of the stock market at time 1 is higher than the initial price, the insurer prefers a positive investment.
Since EeL1  1 means that the expected price of the stock market at time 1 is equal to the initial price, investment is unne^  0 in general. That is to say, under the model
cessary when EeL1  1. From the narrates of Remark 3.1, we know y
described by Lvy process and the investment strategy adopted in Lemma 3.2, an insurer does not sell short the stock
generally.
2

Remark 3.6. When the stock price follows a geometric Brownian motion with a c r2 and b r, we have m  0 here, then
2
^ 1 and Lundberg coefcient ^r1 sat^1 a=b2 . The investment A
equation Gy 0 becomes a b y 0, the solution of which is y
^ 1 ^r1 y
^1 . Now we compare it to the model described by general Lvy process. Denote the solution of Gy 0 by y
^2 . ^r 2 satisisfy A
^
^1  0, then Gy
^2 0
es (13) and the investment is A2 . Due to the fact that the function Gy is increasing, we know if Gy
^ 1 ^r1 6 A
^ 2 ^r2 . In another word, investing the same amount of money into stock market, the model
^1 6 y
^2 , namely A
implies y
R 1 x
2
^1 0; Gy1  0 implies f 1
e  1expfy1 e x  1g
described by general Lvy process is safer. For a b y
Ijxj61 mdx  0, which means there are more positive jumps of stock price with more possibilities. It is consistent with our
R 1
intuition. We can draw the opposite conclusion when f 1 e x  1expfy1 e x  1g  Ijxj61 mdx  0.
We now give some numerical examples to illustrate the result in Section 3. The parameters we set ensure that the returns
of the stock under three different models have the equal expectation and variance in unit time. We let EL1 0:5, and
VarL1 2 in each following model. We set k 0:2; c 2 in the following. There are three models for stock price as
follows:
Model 1 (Geometric Brownian motion risky process): Assume the log returns of the risky asset are modeled by

Lt at bWt:
2

^ a b =2 =2b . Let a 0:2; b 0:5 in this model.

~ y
Then equation Gy 0 becomes a  b =2 b y 0. Here u
Model 2 (Geometric Brownian motion with Jumps as risky process): Assume the log returns of the risky asset are modeled by

Lt at bWt Q t;

t P 0;

PMt
where WttP0 is a standard Brownian motion and Q t n1 Y n ; t P 0 is given by a homogeneous Poisson process Mt
with intensity l and i.i.d. jump sizes fY n ; n P 1g with the generic random variable Y.
Kou [15] considers the case that Y has a double-exponential distribution. For the case, Y has density function

f x

c1
expfc1 jxjg;
2

c1 > 0;

x 2 R:

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

In this model, equation Gy 0 becomes

2

a 

b
2
b yl
2

e x  1eye

x 1

1

c1 c1 jxj
e
dx 0
2

And we also have

2

~ y ay 
u

b
b y2
y
l
2
2

eye

x 1

1

1

 c1 c jxj
e 1 dx:
2

p
We set a 0:2; c1 3; b 5=6; l 0:5 in this model.
Model 3 (VG Lvy process as risky investment process, exponential distribution as the distribution of claim size): Let
claim size be distributed by Ra with a > 0 and log return of the risky asset be modeled by the variance gamma process (VG)
which was suggested by Madan and Senta [16]. A non-symmetric VG model is given by

Lt lt WYt;

t P 0;
2

where l > 0; W is a Brownian motion with drift a < 0 and variance b ; Yt is a gamma Lvy process independent of W and
satises Y1 has the same distribution as Cg; b whose density is given by

f C x

bg xg1 ebx
;
Cg

x P 0;

for parameters b; g > 0. The characteristic triplet of Y is 0; 0; mC with mC dx Ix>0 gx1 ebx dx. The mean and the variance of
2

L1 are given by EL1 l ag=b and VarL1 b g=b a2 g=b2 .

The Laplace exponent of L is

us ls  g log 1 



1 2 s2
b
 sa ;
b
2

s 2 R:

The Lvy measure of L is given by

q 1
0
2
a2 2b b2 =gjxj
b2
ax
Adx;
mdx
exp @ 2 
2
gjxj
b
b

x 2 R:

Equation Gy 0 is given by

~ y l 
u

e x  1e

1

ye x 1

q 1
0
2
a2 2b b2 =gjxj
b2
ax
Adx 0:
exp @ 2 
2
gjxj
b
b

We let b g 4 and l 0:2; a 0; b 0:5.

Model 2, 3 were also considered in Klppelberg and Kostadinova [13]. Next we give the numerical outcomes in Table 1
and 2.
In Table 1, we assume that the size of claims has an exponential distribution with parameter 1, then
r
.
F X x 1  ex ; x  0, and hr 1r
In Table 2, we set that the size of claims has a gamma distribution with parameter 0:5 and 0:75, so X has the density
0:5 0:5

x
f X x 0:75C0:5

e0:75x .

Remark 3.7. From the above two tables, we can see that: compared to the model in Gaier et al. [6], the smaller Lundberg
coefcients are obtained when the models are described by general Lvy process. That is to say, if the insurer uses geometric
Brownian motion to describe the risky market, the upper bound of ruin probability will decrease. That is to say, if the
insurance models the risky market by geometric Brownian motion, he will give a optimistic evaluation of risk. However, in
this case he will face a potential risk that is incurred by false model. It could give rise to the increase of initial capital in order
to control the risk.

Table 1
Claims follow exponential distribution.

Model 1
Model 2
Model 3

^
~ y
u

^
Kt A

^r

0.2133
0.1354
0.2017

0.8449
1.5391
1.4686

0.9104
0.9069
0.9099

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Table 2
claims follow gamma distribution.

Model 1
Model 2
Model 3

^
~ y
u

^
Kt A

^r

0.2113
0.1354
0.2017

1.0372
1.8842
1.8022

0.7416
0.7409
0.7415

4. Applications and asymptotic optimality

From Chapter 4 in [19], we have the following representation for the Lvy process:

Lt ct rWt

DLsIfjDLsj>1g

0<s6t

xJds; dx  mdxds;

22

jxj61

J is a Poisson random measure, for each Borel set B  0; 1 R n f0g; J , #ft; DLt; x 2 Bg. Since a jump size DL of L
leads to a jump size expDL  1 of ~L, by (8) we have:



Z 1
2
X
~Lt c r
e x  1Ifje x 1j61g  xIfjxj61g mdx t rWt
eDLs  1IfjeDLs 1j>1g
2
1
0<s6t
Z t Z

e x  1Jds; dx  mdxds

23

je x 1j61

In this section we give the applications of the results in Section 3 to the model given in Section 2, showing an asymptotic
^ and the exponent ^r . From now on, we give a smaller admissible set
optimality result for the constant investment strategy A
K1 which is the subset of K,

K1 , D fKttP0 : K 2 K; 0 < Kt 6 C a:s: for any t P 0g

where C are determinist positive constant, representing the bound of Kt.
Remark 4.1. In fact, it is quite natural for us to consider strategies in K1 e.g. we take restrictions on short selling as given.
From Remark 3.1, if the short selling is committed, then uy 1 except for some special measure m. In another word, the
investment risk has heavy tail. Furthermore, the leverage trading will amplify this risk. [1] report that 70% of the mutual
funds explicitly state (in Form N-SAR handed to the SEC) that short selling is not permitted. The authors, however, assert that
these restrictions are more than regulatory prohibitions. Please see [9] as well.
^ is an asymptotic optimality investment strategy in K1 .
We want to show that the constant investment strategy A
Throughout, we assume that the claim size X has uniform exponential moment which was introduced by [6]: we say X
has uniform exponential moment in the tail distribution for some r if supyP0 EeryX jX > y < 1.
Lemma 4.1. Assume that X has a uniform exponential moment in the tail distribution for ^r. Then for each K 2 K1 , the process
Mt ^ s Mt ^ s; u; K; ^r e^rUt^s;u;K is a uniform integrable submartingale.
Proof. Notice that ~
Lt is of the form (23). Hence, let us apply It formula to the process Mt and yield that for arbitrary
K 2 K1 and ^r ,

Mt



Z t
r2
1
Ms ^r c  ^r Ks ^r 2 r2 K 2 s dt  ^r r
MsKsdWt
2
2
0
0
Z 1

Z t
Ms^r Ks
xIfjxj61g  e x  1Ifje x 1j61g mdx  c dt

0
1
Z t
X
MsexpfKs^r eDLs  1g  1IfjeDLs 1j>1g
Mse^rX Ns  1dNs

0<s6t
Z t

Ms

expfKs^re x  1g  1Jdx; ds ^r Kse x  1mdxds

24

je x 1j61

Let

Z 1
r2
1
f K; ^r : kh^r  c^r  ^r cKt ^rKt
xIfjxj61g  e x  1Ifje x 1j61g mdx  ^r Kt ^r 2 r2 K 2 t
2
2
1
Z
Z
x
x
expfKt^r e  1g  1dmx
expf^r Kte  1g1 ^r Kte x  1mdx

je x 1j>1

~ ^r Kt:
kh^r  c^r u

je x 1j61

25

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Since kh^r kEe^rX Nt  1, the stopped process Mt ^ s can be expressed in terms of stochastic integrals as

Mt ^ s

t^s

Msf K; ^r ds  ^rr

0<s6t^s

Z
Z

MsKsdWt

t^s

Mse^rX Ns  1dNs  kEerX Nt  1

MsexpfKs^r eDLs  1g  1IfjeDLs 1j>1g 

t^s

Ms

t^s

Ms

t^s

Msds
0

expf^r Kte x  1g1mdxds

je x 1j>1

expfKs^r e x  1g  1Jdx;ds ^r Kse x  1mdxds

je x 1j61

t^s

t^s

Ms

expf^r Kte x  1g  1 ^r Kte x  1mdxds:

je x 1j61

Since 0 6 Ms 6 1 for 0 6 s 6 s, the stochastic integral

^rr

t^s

MsKsdWs

26

is a local martingale and it is also a martingale. The process

t^s

Mse^rX Ns  1dNs  Ee^rX Nt  1

t^s

Mskds:

27

is also a martingale, which is shown in Appendix A of [6]. Next, we show that

MsexpfKs^r eDLs  1g  1IfjeDLs 1j>1g 

0<s6t^s

t^s

Ms

expf^r Kse x  1g  1mdxds:

28

je x 1j>1

is also a local martingale and it is also a martingale.

Let Y n , the size of the nth jump of eDLs  1IfjeDLs 1j>1g ; n 1; 2; 3; . . ., constitutes a sequence of i.i.d random
~dx=g. T n , the time of the nth jump, n 1; 2; . . ., forms another sequence of i.i.d. and
variables with common df F Y x m
exponentially distributed random variables independent of fY n gnP1 . N 1 t supfn : T n 6 tg is a Poisson process with
intensity g > 0.
P
MsexpfKs^reDLs  1g  1IfjeDLs 1j>1g can be represented as
For 0 6 t 6 T, The process
t^s<s6T^s

1
X
MT n expfKT n Y n g  1IfjY n j>1g Ift^s<T n 6T^sg :
n0

Then, we obtain for 0 6 t 6 T,

(
)
1
X
E
MT n expfKT n Y n g  1IfjY n j>1g Ift^s<T n 6T^sg jF t^s
n0

(
)
1
X


E MT n expfKT n ^rY n g  1IfjY n j>1g Ift^s<T n 6T^sg jF T n  jF t^s
n0

(
1
X



MT n Ift^s<T n 6T^sg E expfKT n ^rY n g  1IfjY n j>1g jF T n  jF t^s

n0

(
1
X

MT n If t ^ s < T n 6 T ^ sg

E
E

(Z
(Z
(Z

T^s

Ms
t^s

Ms
t^s

)
expfKs^r xg  1dF Y xgdsjF t^s

jxj>1

T^s

Ms

expfKs^r xg  1dF Y xdN 1 sjF t^s

jxj>1

T^s

t^s

expfKT n ^r xg  1dF Y xjF t^s

jxj>1

n0

Z
je x 1j>1

)
x

expfKs^re  1g  1mdxdsjF t^s :

where from the fth to the sixth line we have used that N 1 t  gt is a martingale. Hence, (28) is a local martingale w.r.t.
the stopped ltration F t^s . A standard argument [18, p. 11] shows that (32) is also a local martingale w.r.t. the
ltration F t .
In the same way, for any e > 0 small enough, we can get the process

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

X
0<s6t^s

MsexpfKs^r eDLs  1g  1Ife6jeDLs 1j61g

t^s

Ms

^r Kse x  1mdxds

e6je x 1j61

t^s

Ms

expf^r Kse x  1g  1 ^rKse x  1mdxds:

29

e6je x 1j61

is a local martingale which is also a martingale w.r.t. the ltration F t .

Since K 2 K1 , the inequality ex 6 1  x x2 =2 and 0 6 Ms 6 1 for 0 6 s 6 s hold. Using dominated Convergence
Theorem, let e ! 0, we obtain that the process

t^s

Ms

expfKs^r e x  1g  1Jdx; ds ^rKse x  1mdxds

je x 1j61

t^s

Ms

expf^r Kse x  1g  1 ^r Kse x  1mdxds:

je x 1j61

is also a local martingale w.r.t. the ltration F t .

^, (28) and Lemma 3.2, we get
~ y
According to kh^r c^r  u

~ ^r Kt u
~ y
^ u
~ ^rKt P u
~ y
^ u
~ y
^ 0:
f K; ^r kh^r  c^r u

30

R T^s

Therefore t^s Msf K; ^r ds P 0 for all 0 6 t 6 T. Putting the pieces from (24) together, it is can be easily concluded that
Mt ^ s is a local submartingale. In fact, Mt ^ s is a true submartingale if Mt ^ s is uniform integrable. We identify the
uniform integrable of Mt ^ s to complete the proof.
Using the notation M  , suptP0 jMt ^ sj, we get that

EM   6 EMsjs < 1 6 EMsjs < 1; Us > 0:

31

The second inequality holds since Ms; u; K; ^r is equal to 1 on fs < 1; Us 0g and Ms P 1 on fs < 1; Us > 0g.
The event fs < 1; Us 0g means that ruin occurs a.s. through the Brownian motion, and fs < 1; Us > 0g means that
ruin occurs through a jump. Event fs < 1; Us > 0g can be decomposed into

fs < 1; Us > 0g fs < 1; Us > 0;

> 0;

ruin through the claimsg fs < 1; Us

ruin through the jumps of the stock priceg : A1 A2 :

32

Now we simulate the proof of Theorem 4 in Gaier et al. [6].When Vdt is the probability distribution of s t and Hdt; dy
R1
denotes the joint probability distribution of s t, Us y > 0, a claim has distribution function dF X z= y dF X u (for
z > y). we have

EM   6 EMs; u; K; ^r js < 1; Us > 0 6 EMs; u; K; ^r jA1  EMs; u; K; ^r jA2  : I1 I2 :

33

By the assumption of uniform exponential moment, we obtain

I1

sup
yP0

Hdt; dy

Z
y

Z
y

^ryv

dF v
R1 X
6
dF X u
y

supyP0

Z
y

^r yv

dF v
R1 X
dF X u
y

!Z
0

Hdt; dy

dF X v
e^ryv R 1
<1
dF X u
y

34

and

h
i
h
i
DLs
DLs
I2 E e^rUsKse 1 jA2 E e^rUsKse 1 jKs > 0; DLs < 0; KseDLs  1 > Us
h
i
DLs
6 E e^rUsCe 1 jKs > 0; DLs < 0; KseDLs  1 > Us


6 E e^rUsC jKs > 0; DLs < 0; KseDLs  1 > Us < 1

35

The second inequality in (35) holds because eDLs  1 > 1. The last equality follows by the fact of Us P 0.
A standard argument, gives that Mt ^ s; u; K; ^r is a uniformly integrable submartingale. h

Lemma 4.2. If X has uniform exponential moment in the tail distribution for ^r , and we further assume that the size of claim is a
random variable that is nondegenerate at zero. Then for any K 2 K1 and u 2 R ,the stopped wealth process Ut ^ s; u; K converges
almost surely on fs 1g to innity for t ! 1.

1042

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Proof. The proof of Lemma is trivial, because any uniformly integrable submartingale converges. That the limit on
cannot be nite follows readily from the BorelCantelli Lemma.
^ h
With the help of the two preceding lemmas we can nally prove the optimality of investment strategy A.

s<1

Theorem 4.1. Assume that the conditions in Lemma 4.1 are satised.Then the ruin probability satises, for every admissible
K 2 K1 ,

Wu; K P C 1 e^rx :

36

where

C1

1
:
supyP0 Ee^ryX jX > y

Proof. By Doobs Optional Sampling Theorem and Lemma 4.2.

e^ru M0; u; K; ^r 6 EMs; u; K; ^r :

Using Lemma 4.1, we get

h
i
EMs; u; K; ^r  EMs; u; K; ^r js < 1Ps < 1 E lim Ms; u; K; ^r js 1 Ps 1
t!1

EMs; u; K; ^r js < 1Ps < 1:

37

Using (32)(36), we obtain

Wu; K P e^ru

1
P C 1 e^ru :
EMs; u; K; ^rjs < 1Ps < 1

The proof is ended.

38

5. The optimal constant mix strategy

In this section, we consider the so called constant mix strategy, i.e. the initial proportions which are invested into bond
and stock remain constant over a predetermined planning horizon; see e.g. [4]. We relax the assumption that the interest
rate of the bond is not zero. The insurance risk reserve process R is consistent with the previous section. we will consider
an insurance company, which consists of a bond and some stock, the company invests into a BlackScholes type market,
and it is modeled by an exponential Lvy process. The respective price processes follow the equations

Bt edt and St eLt ;

t  0:

39

We have

dBt dBtdt;

t > 0;

B0 1;

40

r
dSt Std~Lt StdLt dt eDLt  1  DLt;
2
2

t > 0;

S0 1;

41

At each instant of time an initially xed fraction h 2 0; 1 of wealth is invested in the risky asset and the fraction 1  h into
the riskless asset. This strategy is dynamic in the sense that it requires a rebalance of the portfolio at any moment of time
which depends on the corresponding price changes. This approach is based on self-nancing portfolios and hence is classical
in nancial portfolio optimization. The fraction h is called the investment strategy. Let Lt be a Lvy process with characteristic triplet c; r2 ; m. Denoted by EL the solution of the following equation

dZt ZtdLt;

Z0 1:

42

The process Z EL is called the stochastic exponential or DolansDade exponential of L. Proposition 8.21 in Tankov and
Cont [20] gives the existence and uniqueness of EL.
Next we follow the way used by Klppelberg and Kostadinova [13] to introduce the integrated risk process (IRP) as the
result of the insurance business and the net gains of the investment through a stochastic differential equation (SDE).
Denition 5.1. For an investment strategy h 2 0; 1, we call the solution to the SDE

dU h t cdt  dAt U h td~Lh t;

t P 0;

U h 0 u;

43
PNt

Lh t 1  hddt hd~Lt; ~
Lt satises that E~L e ; At n1 X n is the total
the integrated risk process (IRP), where d^
claim amount process, d > 0 is the riskless interest rate.
Provided that the insurance and the investment processes are independent, by Lemma 2.2 in Klppelberg and
Kostadinova [13] the solution to the SDE (8) is
Lt

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045



Z t
U h t eLh t u
eLh v cdv  dAv ;

1043

44

where Lh satises eLh t E~

Lh . By Lemma 2.5 in Emmer and Klppelberg (2004) the Lh is a Lvy process with characteristic
~ h and characteristic triplet c ; r2 ; mh which is specied by the original process L in the following way:
exponent W
h


 Z
r2
ch ch 1  h d h log1 he x  1Ifj log1he x 1j61g  hxIfjxj61g mdx;
2
R

r2h h2 r2 ;
mh A mfx 2 R : log1 he x  1 2 Ag for any Borel set A  R:

45

Denote the Laplace exponents of the processes Lh by uh; s log Ee

 exists by provided. From the Lemma 3.2(c) in
[14], we can get that uh; s < 1 for all h 2 0; 1 and s 2 R if us < 1. Lemma 5.3.1. in [14] shows that: If 0 < EL1 < 1
and either r > 0 or m1; 0 > 0, then for h 2 0; 1 there exists a unique positive j jh > 0 such that uh; j 0.
Let us denote the discounted net loss process (DNLP) by
sLh 1

V h u  eLh t U h t

eLh v dAv  cdv ;

t P 0:

46

Kostadinova [14] studies the tail behavior of the ultimate integrated risk for the discounted net loss process, namely
1
PV 1
h > x, where V h lim V h t. If the order of the nite moment of the claim-size distribution is greater than jh , then
t!1

the extreme of nancial risk determines the tail behavior of the ultimate integrated risk for the discounted net loss process.
It is dened as dangerous investment. If the distribution function of claim sizes has a regularly varying tail with tail index
a < 0 and a < jh , the extreme of insurance risk determines the tail behavior of the ultimate integrated risk for the discounted net loss process. They called this case as dangerous claims.
Kostadinova [14] considers a risk measure which is frequently used in practice-Value-at-Risk (VaR) and dened in the
framework of the integrated risk model. And they study the optimal strategy that maximizes the expected wealth of the
insurance company under a risk constraint on the Value-at-Risk. The optimization problem is given as follows:

max EU h t subject to VaRb V 1

h 6 C:
h2H

47

for a given constraint C > 0 on the risk, and a given small probability b. The set H contains all reasonable investment strategies. They provide and compare several methods for an approximation of the optimal investment strategy.
In fact, insurers pay more attention to their future nite time risk, for example, ten years, twenty years, and can change
initial capitals by introducing new stock holders or adding the shares of their companies and adding or decreasing premiums
according to the insurers management situations. In this section, we consider the optimal investment strategy under a risk
constraint on the Value-at-Risk for nite time.
Denote the most net loss before some xed nite time T by V h : sup06t6T V h t. We give the denition of risk measure by
Value-at-Risk, which takes the unied consideration of risk during 0; T.
Denition 5.2. VaR is dened as some high quantile of the corresponding loss distribution:

VaRb V h inffx 2 R : PV h > x 6 bg

48

where b 2 0; 1 is some (typically small) probability. Since denition 2 has been given, we give the following optimization
model.
Model A.

max EU h T

h20;1

subject to VaRb V h 6 C;
for a given constraint C > 0 on the risk, some xed time period T > 0 and a given small probability b.
If we dene the ruin probability up to the time T by

wu; T PfV h t > u;

for some 0 6 t 6 Tg

49

equivalently,



wu; T P sup V h t > u :
06t6T

By the denition of VaR, model A is equivalent to model A

Model A

max EU h T

h20;1

subject to inffx 2 R : wx; T 6 bg 6 C:

50

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P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

Thus we can consider VaRb V h as the least initial capital that the insurer should prepare such that the nite time ruin
probability is no more than b. As it is hard or even impossible to solve model A analytically, our goal is to provide approximate method to obtain the solution. Heyde and Wang [10] investigate the nite time ruin probability for the integrated risk
model under the condition that claims have regularly varying tails. They give the equivalent formula of nite time ruin
probability and nd an interesting phenomenon that the extreme of insurance risk dominates the extreme of nancial risk
even for the case of dangerous investment.
First, we introduce a class of heavy-tailed distribution, which is crucial for our purpose. We say that a distribution function F X x has a regularly varying tail with tail index a < 0, denoted by F X x 2 Ra . If there is some slowly varying function
L
such that

FX x xa Lx; x > 0

51

and for two functions a

and b
, we write ax  bx in the following section when limx!1 ax=bx 1 holds.
Let h be the optimal strategy. We are ready to state the main result of this section:
Theorem 5.1. Assume that h 2 0; 1 and u1 > d. If the safety loading condition holds and the size of claims has continuous
distribution function F X x 2 Ra . Then the optimization problem of model A is approximately equivalent to nd

h maxfh 2 0; 1 : Juh; a P FX Cg;

52

h;a
when fh 2 0; 1 : Juh; a P FX Cg is non-empty set,where Juh; a kexpbuuh;
aT1. If ua 1 d P ua holds: Then there

h 2 0; 1 maximizing Juh; a. FX C 6 Ju^
h; a implies h h2 , otherwise fh 2 0; 1 : Juh; a P FX Cg is empty set,
exists ^

where h2 is the larger solution of the equation:

Juh; a FX C:

53

If ua 1 d > ua holds: Then h 1

fh 2 0; 1 : Juh; a P FX Cg is empty set.

Juh; a.

maximizes

FX C 6 Ju1; a

implies

h 1,

otherwise

Proof. See Lemma 3.4.4 in [14]. If c  kEX holds and u1 > d, then the function EU h t is increasing in h. Consequently,
the portfolio optimization model A is equivalent to

maxfh 2 0; 1 : inffx 2 R : wx; T 6 bg 6 Cg:

54

Due to Theorem 2.1. in [10], if F X x 2 Ra , then we can get that for every xed T > 0,

wx; T 

k1  expuh; aT 
F X x; x ! 1:
uh; a

55

For enough large x, we replace (54) by





kexpuh; aT  1 
F X x 6 b 6 C :
max h 2 0; 1 : inf x 2 R :
uh; a

56

By the fact that expuh; aT  1 and uh; a have the same sign, and FX x is continuous and decreasing, we have:





kexpuh; aT  1 
buh; a
F X x 6 b inf x 2 R : FX x 6
inf x 2 R :
kexpuh; aT  1
uh; a


b
u
h;
a

F1
;
X
kexpuh; aT  1

57

Noticing that F 1
X x is decreasing, we substitute (57) in (56), then (52) holds.
For notational reasons, we let Juh; a buh; a=kexpuh; aT  1.
Next, we consider the properties of uh; a. Lemma 3.2.5. in [14] tells us that uh; a is strictly convex in h if d < u1 and
@
u0; a u1  da < 0. we can nd h^ which is the point that uh; a gets the least value. By (45), we have:

@h

uh; a  d h c

r2
2


d

r2
2

aa 1h2

a

1 he x  1

 1 ahxIfjxj61g mdx;

58

1

notice that



Z 1
 x

@
r2
u1; a  c  d a r2 aa 1  a
e  1ea1x  xIfjxj61g mdx aua 1  ua d:
@h
2
1

59

@
If @h
u1; a P 0, equivalently, ua 1 d P ua, there exists ^h 2 0; 1 minimizing the function uh; a; If
ua 1 d < ua; uh; a is decreasing in h when h 2 0; 1.

P. Li et al. / Applied Mathematics and Computation 259 (2015) 10301045

1045

We also have,

@
bexpuh; aT  1  buh; aT expuh; aT
Juh; a
:
@u
kexpuh; a  12
It is easily checked that

60

uh; a  0 holds by the inequality expx  1  x for x 2 R. In another word, Juh; a is

@
J
@u

decreasing in uh; a.
Thus, under the condition ua 1 d P ua, there exists ^
h 2 0; 1 maximizing the function Juh; a. If

F X C 6 Ju^
h; a, otherwise, fh 2 0; 1 : Juh; a P FX Cg is empty set. then equation Juh; a FX C has two
solutions h1 6 h2 by the properties of function J. By comparing Ju1; a and FX C, if Ju1; a < FX C, then h h2 ; if
Ju1; a < FX C, then h 1.
On the other hand, for ua 1 d < ua; Juh; a increases in h 2 0; 1 and arrives at its most value at h 1, If
FX C 6 Ju1; a, otherwise, fh 2 0; 1 : Juh; a P FX Cg is empty set, then equation Juh; a FX C has a unique
solution h1 2 0; 1. we have h 1. The proof ends.
The next corollary shows how the optimal strategy h changes depends on T. h
Corollary 5.1. The optimal strategy h given in Theorem 5.1 is decreasing with the increasing of T.
Proof. Given 0 < T 1 < T 2 , we have:


h 2 0; 1 :

 

buh; a
buh; a
6 FX C  h 2 0; 1 :
6 FX C :
kexpuh; aT 2  1
kexpuh; aT 1  1

which implies h T 1 P h T 2 by (52). This ends the proof.

61

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