A comparative study of portfolio insurance

✍ Scribed by Suleyman Basak

• Publisher: Elsevier Science
• Year: 2002
• Tongue: English
• Weight: 165 KB
• Volume: 26
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(01)00043-4

✦ Synopsis

This paper undertakes a comparative study of portfolio insurance under a variety of modeling strategies. Speciÿcally, we focus on portfolio insurers who derive utility from horizon wealth, with marginal utility tending smoothly to inÿnity at some pre-speciÿed oor. We solve for the optimal consumption-portfolio-wealth of these portfolio insurers and compare with 'constrained' portfolio insurers and 'normal agents.' General equilibrium conditions are contrasted under pure-exchange and production-type models. While the market price level is unambiguously increased under pure-exchange, under production the e ect on market level is state-dependent. In both models the market volatility and risk premium are decreased by portfolio insurance. The paper also investigates the possible relationship between portfolio insurance type trading strategies and market volatility.