A Comparative Study of Portfolio Insurance

London Business School Working Paper IFA 344

24 Pages Posted: 22 Dec 2001

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 2001

Abstract

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

Suggested Citation

Basak, Suleyman, A Comparative Study of Portfolio Insurance (May 2001). London Business School Working Paper IFA 344. Available at SSRN: https://ssrn.com/abstract=292221 or http://dx.doi.org/10.2139/ssrn.292221

Suleyman Basak (Contact Author)

London Business School ( email )

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HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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