Time-consistent mean–variance asset-liability management in a regime-switching jump-diffusion market

Abstract

This paper investigates the time-consistent optimal control of a mean–variance asset-liability management problem in a regime-switching jump-diffusion market. The investor (a company) is investing in the market with one risk-less bond and one risky stock while subject to an uncontrollable liability. The risky stock and the liability processes are discontinuous with correlated jumps and modulated by a continuous-time observable Markov chain that represents the market state. This hybrid model can capture both long-term and short-term effects on the investing process resulting from the market movements and unexpected events. Under a game-theoretic framework, we derive the regime-switching jump-diffusion version of the extended Hamilton–Jacobi–Bellman (HJB) system as well as the verification theorem, based on which we obtain the closed-form equilibrium control and equilibrium value function in terms of five systems of ordinary differential equations by solving the extended HJB equation. Finally, a numerical analysis investigates the influence of changes in the model parameters on our solution, and it is discovered that regime switching and jump diffusion both have great effect on the investment and therefore should be considered in conjunction.

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Acknowledgements

The authors are particularly grateful for the editor and anonymous reviewers for their valuable and constructive suggestions.

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China Scholarship Council (201506980013, Yu Yang).

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Correspondence to Yu Yang.

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Yang, Y., Wu, Y. & Wiwatanapataphee, B. Time-consistent mean–variance asset-liability management in a regime-switching jump-diffusion market. Financ Mark Portf Manag (2020). https://doi.org/10.1007/s11408-020-00360-6

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Keywords

  • Asset-liability management
  • Extended Hamilton–Jacobi–Bellman system
  • Regime-switching
  • Markov chain
  • Jump-diffusion
  • Time inconsistency
  • Equilibrium control

JEL Classification

  • C61
  • C72
  • G11