A numerical method for the expected penalty-reward function in a Markov-modulated jump-diffusion process Articles uri icon

publication date

  • July 2011

start page

  • 126

end page

  • 131


  • 1


  • 49

International Standard Serial Number (ISSN)

  • 0167-6687

Electronic International Standard Serial Number (EISSN)

  • 1873-5959


  • A generalization of the Cramér&-Lundberg risk model perturbed by a diffusion is proposed. Aggregate claims of an insurer follow a compound Poisson process and premiums are collected at a constant rate with additional random fluctuation. The insurer is allowed to invest the surplus into a risky asset with volatility dependent on the level of the investment, which permits the incorporation of rational investment strategies as proposed by . The return on investment is modulated by a Markov process which generalizes previously studied settings for the evolution of the interest rate in time. The Gerber&-Shiu expected penalty&-reward function is studied in this context, including ruin probabilities (a first-passage problem) as a special case. The second order integro-differential system of equations that characterizes the function of interest is obtained. As a closed-form solution does not exist, a numerical procedure based on the Chebyshev polynomial approximation through a collocation method is proposed. Finally, some examples illustrating the procedure are presented.