Optimal Consumption, Investment, and Insurance in Multi-State Path-Dependent Models

We study how past consumption and health history affect optimal consumption, investment, and insurance in a multi-state life-insurance model. Two one-dimensional indices encode these distinct forms of history. The Habit-index is controlled by consumption and enters preferences, whereas the Health-index is uncontrolled and may also determine biometric transition intensities; state duration is obtained as a special case. Under power utility, both formulations admit explicit feedback controls and Feynman–Kac representations but lead respectively to systems of ordinary and partial differential equations. We give a verification theorem for the augmented-state control problem. A stylised three-state disability example isolates the mechanism through which additive habit formation can generate a consumption hump.

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Publication Details

Journal
Journal of risk and financial management
Published
2026-10-04
DOI
https://doi.org/10.3390/jrfm19100771
Primary Topic
Stochastic processes and financial applications
Type
article
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article

Optimal Consumption, Investment, and Insurance in Multi-State Path-Dependent Models

Mogens Steffensen, Jens H. Fischer, Peter Garde
Journal of risk and financial management
Stochastic processes and financial applications
article

Optimal Consumption, Investment, and Insurance in Multi-State Path-Dependent Models

Mogens Steffensen, Jens H. Fischer, Peter Garde
article en

Abstract

We study how past consumption and health history affect optimal consumption, investment, and insurance in a multi-state life-insurance model. Two one-dimensional indices encode these distinct forms of history. The Habit-index is controlled by consumption and enters preferences, whereas the Health-index is uncontrolled and may also determine biometric transition intensities; state duration is obtained as a special case. Under power utility, both formulations admit explicit feedback controls and Feynman–Kac representations but lead respectively to systems of ordinary and partial differential equations. We give a verification theorem for the augmented-state control problem. A stylised three-state disability example isolates the mechanism through which additive habit formation can generate a consumption hump.

Journal of risk and financial managementVol. 19(10)
University of Copenhagen (DK)
Openalex Percentile: Top 7%
Stochastic processes and financial applications
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Optimal Consumption, Investment, and Insurance in Multi-State Path-Dependent Models — Mogens Steffensen, Jens H. Fischer, et al. · Journal of risk and financial management (2026) | TGRS Research Map | TGRS