Portfolio Choice with Puts: Evidence from Variable Annuities

Posted: 11 Sep 2008

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: September 10, 2008

Abstract

This study investigated the asset allocation behavior of individuals who select an out-of-the-money long-dated longevity-put option on their investment funds. The asset allocations of these people within their variable annuity sub accounts are 5-30 percent more risky than the allocations of those who do not choose this protection. Investors who do not choose the longevity-put option follow the classic life-cycle, age-phased reduction in equity. A rudimentary model of utility-maximizing behavior is suggested that justifies the increased allocation to risk as long as the investor understands the payoff structure of the longevity put and is willing and able to exercise the annuity option if and when it matures in the money.

Keywords: Private Wealth Management, Asset Allocation, Asset Location, Derivative Instruments, Equity Derivatives, Investment Theory, Behavioral Finance

Suggested Citation

Milevsky, Moshe Arye and Kyrychenko, Vladyslav, Portfolio Choice with Puts: Evidence from Variable Annuities (September 10, 2008). Financial Analysts Journal, Vol. 64, No. 3, 2008. Available at SSRN: https://ssrn.com/abstract=1266189

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Vladyslav Kyrychenko

Manulife Asset Management ( email )

200 Bloor Street East
NT-5
Toronto, Ontario M4W1E5
Canada

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