Equilibrium of Financial Derivative Markets and Compensating Variations Under Portfolio Insurance Constraints

58 Pages Posted: 1 Oct 2012

See all articles by Philippe Bertrand

Philippe Bertrand

AMGSM-IAE Aix-en-Provence, Aix Marseille University, CERGAM; KEDGE Business School

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA

Date Written: December 1, 2011

Abstract

This paper examines the equilibrium of portfolio under insurance constraints on the terminal wealth. We consider a single period economy in which agents search to maximize the expected utilities of their terminal wealths. Both partial and general optimal financial equilibria are determined and analyzed for quite general utility functions and insurance constraints. We introduce also the notion of compensating variation to quantify the monetary loss of not having the true optimal portfolio profile, for the clients and also for the bankers.This paper examines the equilibrium of portfolio under insurance constraints on the terminal wealth. We consider a single period economy in which agents search to maximize the expected utilities of their terminal wealths. Three main classes of financial assets are considered: a riskless asset (usually the bond), a risky asset (the stock) and European options of all strikes (corresponding to financial derivatives). Both partial and general optimal financial equilibria are determined and analyzed for quite general utility functions and insurance constraints. We introduce also the notion of compensating variation to quantify the monetary loss of not having the true optimal portfolio profile, for the clients and also for the bankers.

Keywords: Optimal positioning, financial derivatives, portfolio insurance, financial equilibrium, compensating variation

JEL Classification: C62, G11, L70

Suggested Citation

Bertrand, Philippe and Prigent, Jean-Luc, Equilibrium of Financial Derivative Markets and Compensating Variations Under Portfolio Insurance Constraints (December 1, 2011). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2083607 or http://dx.doi.org/10.2139/ssrn.2083607

Philippe Bertrand (Contact Author)

AMGSM-IAE Aix-en-Provence, Aix Marseille University, CERGAM ( email )

Chemin de la Quille - Puyricard
Aix en Provence, 13089
France

KEDGE Business School ( email )

Domaine de Luminy - BP 921
BP 921
Marseille, PACA 13288
France

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA ( email )

33 boulevard du port
33 bd du Port
F-95011 Cergy CEDEX
France

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