A Comparative Study of Portfolio Insurance

Abstract:     
This paper undertakes a comparative study of portfolio insurance under a variety of modelling strategies. Specifically, we focus on portfolio insurers who drive utility from horizon wealth, with marginal utility tending smoothly to infinity at some pre-specified floor. 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 effect 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.

Number of Pages in PDF File: 24

Keywords: Portfolio insurance, pure-exchange, production, volatility, trend-chasing

JEL Classification: C60, D51, D90, G11, G12

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