Mean-Variance Investment and Risk Control Strategies -- A Time-Consistent Approach via A Forward Auxiliary Process

Abstract

We consider an optimal investment and risk control problem for an insurer under the mean-variance (MV) criterion. By introducing a deterministic auxiliary process defined forward in time, we formulate an alternative time-consistent problem related to the original MV problem, and obtain the optimal strategy and the value function to the new problem in closed-form. We compare our formulation and optimal strategy to those under the precommitment and game-theoretic framework. Numerical studies show that, when the financial market is negatively correlated with the risk process, optimal investment may involve short selling the risky asset and, if that happens, a less risk averse insurer short sells more risky asset.