Portfolio Choice with Puts: Evidence from Variable Annuities
Posted: 11 Sep 2008
Date Written: September 10, 2008
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
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