Contagion modeling between the financial and insurance markets with time changed processes

Abstract

This study analyzes the impact of contagion between financial and non-life insurance markets on the asset-liability management policy of an insurance company. The indirect dependence between these markets is modeled by assuming that the assets return and non-life insurance claims are led respectively by time-changed Brownian and jump processes, for which stochastic clocks are integrals of mutually self-exciting processes. This model exhibits delayed co-movements between financial and non-life insurance markets, caused by events like natural disasters, epidemics, or economic recessions.

Keywords: Asset-liability management; Cramer–Lundberg risk model; Self-exciting process; Stochastic optimal control; Time-changed Lévy process.