On the Demand for Portfolio Insurance

27 Pages Posted: 16 Nov 2013

See all articles by Andy Fodor

Andy Fodor

Ohio University

James Doran

University of New South Wales

James M. Carson

University of Georgia

David Kirch

Ohio University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: Fall 2013

Abstract

While insurers manage underwriting risk with various methods including reinsurance, insurers increasingly manage asset risk with options, futures, and other derivatives. Previous research shows that buyers of portfolio insurance pay considerably for downside protection. We add to this literature by providing the first evidence on the cost of portfolio insurance, the payoff to portfolio insurance, and the relative demand for portfolio insurance across VIX levels. We find that the demand for portfolio insurance is relatively high at low levels of VIX, suggesting purchasers demand more downside protection when this protection is cheap on an absolute basis (but expensive on a relative basis). We also provide the first evidence on the hedging behavior of specific investor classes and show that the demand for portfolio insurance is driven by retail investors (individuals) who buy costly insurance from institutional investors. Results are consistent with other types of paradoxical insurance‐buying behavior.

Suggested Citation

Fodor, Andy and Doran, James and Carson, James M. and Kirch, David, On the Demand for Portfolio Insurance (Fall 2013). Risk Management and Insurance Review, Vol. 16, Issue 2, pp. 167-193, 2013. Available at SSRN: https://ssrn.com/abstract=2355580 or http://dx.doi.org/10.1111/rmir.12009

Andy Fodor (Contact Author)

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

James Doran

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

James M. Carson

University of Georgia ( email )

Athens, GA 30602-6254
United States

David Kirch

Ohio University - School of Accountancy ( email )

College of Business Administration
526 Copeland Hall
Athens, OH 45701
United States

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