The Illiquidity Discount of Life Insurance Investments

Zeitschrift für die gesamte Versicherungswissenschaft, Vol. 105, Issue 3, 2016

Posted: 7 Mar 2016 Last revised: 7 Nov 2016

See all articles by Ruth Kümmerle

Ruth Kümmerle

WHU - Otto Beisheim School of Management

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: September 16, 2016

Abstract

We incorporate an illiquid life insurance investment in the multi-period investment strategy of an investor with constant relative risk aversion and independent and identically distributed returns. In our setup, the liquid and the illiquid assets are risky and correlated and the illiquid investment cannot be rebalanced. We calculate the illiquidity discount as the difference in certainty equivalent rates of return between the optimal strategy with all assets being rebalanced in each period and the strategy with the illiquid investment. Calibrating our model to data of the German market we find a negative relationship between the level of risk aversion and the illiquidity discount when the investor does not rebalance at all. However, when the investor rebalances his liquid assets in each period to hedge against the illiquid investment the illiquidity discount becomes economically negligible.

Keywords: illiquidity, life insurance, CRRA, portfolio optimization

JEL Classification: D14, G11

Suggested Citation

Kümmerle, Ruth and Rudolf, Markus, The Illiquidity Discount of Life Insurance Investments (September 16, 2016). Zeitschrift für die gesamte Versicherungswissenschaft, Vol. 105, Issue 3, 2016, Available at SSRN: https://ssrn.com/abstract=2742293 or http://dx.doi.org/10.2139/ssrn.2742293

Ruth Kümmerle (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-(0)261-6509-420 (Phone)

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