A Comparative Study of Portfolio Insurance
London Business School Working Paper IFA 344
24 Pages Posted: 22 Dec 2001
Date Written: May 2001
This paper undertakes a comparative study of portfolio insurance under a variety of modelling strategies. Specifically, we focus on portfolio insurers who drive utility from horizon wealth, with marginal utility tending smoothly to infinity at some pre-specified floor. We solve for the optimal consumption-portfolio-wealth of these portfolio insurers and compare with "constrained" portfolio insurers and "normal agents." General equilibrium conditions are contrasted under pure-exchange and production-type models. While the market price level is unambiguously increased under pure-exchange, under production the effect on market level is state-dependent. In both models the market volatility and risk premium are decreased by portfolio insurance The paper also investigates the possible relationship between portfolio insurance type trading strategies and market volatility.
Keywords: Portfolio insurance, pure-exchange, production, volatility, trend-chasing
JEL Classification: C60, D51, D90, G11, G12
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