Legendre transform dual-asymptotic solution for optimal investment, consumption and life insurance strategy under the HLSV model

We investigate the optimal decisions on investment, consumption and purchasing life insurance of a household with two consecutive generations, say parents and children. Parents can invest in risk-free and risky assets, with the risky asset’s price driven by the Heston local-stochastic volatility model, better reflecting market conditions. Life insurance can be purchased to hedge against wealth loss from parents’ unexpected death before retirement, especially if children have no income. Meanwhile, utility functions of the parents and children are individually considered in relation to the uncertain lifetime. The objective of the household is to appropriately maximize the weighted average of the respective utilities of parents and children. In order to derive the optimal strategies, we adopt a dual method, Legendre transformation, and an asymptotic expansion technique to solve the associated Hamilton–Jacobi–Bellman equation achieved by a dynamic programming approach. Finally, an asymptotic solution is obtained and numerical examples are provided to illustrate the impacts of some important parameters on the optimal strategies.