An Optimal Reinsurance and Investment Problem with a Defaultable Security and a Stock with Ornstein-Uhlenbeck Process

In this paper, the insurer is allowed to buy reinsurance and allocate his money among three financial securities: a defaultable corporate zero-coupon bond, a default-free bank account, and a stock, while the instantaneous rate of the stock is described by an Ornstein-Uhlenbeck process. The objective is to maximize the exponential utility of the terminal wealth. We decompose the original optimization problem into two subproblems: a pre-default case and a post-default case. Using dynamic programming principle, and then solving the corresponding HJB equations, we derive the closed-form solutions for the optimal reinsurance and investment strategies and the corresponding value functions