Optimization problem of insurance investment based on spectral risk measure and RAROC criterion

Abstract

This paper introduces spectral risk measure (SRM) into optimization problem of insurance investment. Spectral risk measure could describe the degree of risk aversion, so the underlying strategy might take the investor's risk attitude into account. We establish an optimizationmodel aiming at maximizing risk-adjusted return of capital (RAROC) involvedwith spectral riskmeasure. The theoretical result is derived and empirical study is displayed under different risk measures and different confidence levels comparatively.The result shows that risk attitude has a significant impact on investment strategy.With the increase of risk aversion factor, the investment ratio of risk asset correspondingly reduces.When the aversive level increases to a certain extent, the impact on investment strategies disappears because of themarginal effect of risk aversion. In the case of VaR and CVaR without regard for risk aversion, the investment ratio of risk asset is increasing significantly.