Portfolio Choice With Puts: Evidence from Variable Annuities

32 Pages Posted: 27 Nov 2007

See all articles by Moshe A. Milevsky

Moshe A. Milevsky

York University - Schulich School of Business

V. Kyrychenko

Manulife Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2007


In this paper we investigate the actual portfolio choice and asset allocation behavior of individuals who acquire insurance in the form of an out - of - the - money long dated put option on their investment funds. We compare their allocations against those who do not elect and pay for this type of protection; dubbed a longevity put. Using a unique database of nearly a million variable annuity (VA) policyholders collected by seven different insurance companies, we find that these investors take on 5% to 30% additional risky/equity exposure when the longevity put option is selected. And, when this longevity put option is not purchased - so the investment portfolio resembles a conventional mutual fund - we confirm the classical life-cycle age phased reduction in equity.

We offer a rudimentary model of utility - maximizing behavior in the presence of this longevity put that indeed justifies the increased allocation to risk, provided the investor is willing, able and understands to exercise the annuity option if - and - when it matures in the money. This, of course, is debatable given the long standing body of evidence - first documented by Modigliani(1986) - that individuals intensely dislike annuitization despite its welfare enhancing properties.

Regardless, we believe our paper is the first to examine actual asset allocations within variable annuity policies, which is currently a $1.5 trillion dollar market in the U.S. and is expected to grow as aging baby boomers take control of their own retirement assets.

Keywords: Retirement, Pensions, Lifecycle Investing, Longevity Risk

JEL Classification: D91, G11

Suggested Citation

Milevsky, Moshe Arye and Kyrychenko, Vladyslav, Portfolio Choice With Puts: Evidence from Variable Annuities (November 23, 2007). Available at SSRN: https://ssrn.com/abstract=1032627 or http://dx.doi.org/10.2139/ssrn.1032627

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

Vladyslav Kyrychenko

Manulife Asset Management ( email )

200 Bloor Street East
Toronto, Ontario M4W1E5

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