OPTIMIZATION OF DISASTER RISK REDUCTION INVESTMENT IN ERA OF CLIMATE CHANGE –A STOCHASTIC CONTROL MODEL IN JUMP-DIFFUSION PROCESS–

Abstract

 Hazards of tectonic origin, such as earthquakes and volcanoes, and those of meteorological origin, such as typhoons and torrential rains, which are influenced by climate change, differ in terms of the frequency and probability of disaster occurrence and the spatial extent of damage to the socio-economy. This study develops an optimal investment planning concept for disaster risk management that differentiates between rare and large-scale disaster risks and regularly occurring small-scale disaster risks, as a stochastic control model under a jump-diffusion process. We further develop an algorithm to numerically calculate the optimal value function and investigate the relationship between disaster characteristics and the optimal policy through numerical simulations.