On the Demand for Portfolio Insurance
James S. Doran
Florida State University - Department of Finance
James M. Carson
University of Georgia
Ohio University - School of Accountancy
October 8, 2012
While insurers manage underwriting risk with various methods including reinsurance, insurers increasingly manage asset risk with options, futures, and other derivatives. Previous research shows that buyers of portfolio insurance pay considerably for downside protection. We add to this literature by providing the first evidence on the cost of portfolio insurance, the payoff to portfolio insurance, and the relative demand for portfolio insurance across VIX levels. We find that the demand for portfolio insurance is relatively high at low levels of VIX, suggesting purchasers demand more downside protection when this protection is cheap on an absolute basis (but expensive on a relative basis). We also provide the first evidence on the hedging behavior of specific investor classes, and show that the demand for portfolio insurance is driven by retail investors (individuals) who buy costly insurance from institutional investors. Results are consistent with other types of paradoxical insurance-buying behavior.
Number of Pages in PDF File: 41
Keywords: Portfolio Insurance, Hedging, Volatility, VIX
JEL Classification: G11, G12, G22working papers series
Date posted: July 9, 2010 ; Last revised: October 8, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.391 seconds