Precautionary Saving and Insurance Under Generalized Mean-Variance Preferences

31 Pages Posted: 30 Mar 2017

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Antje Brigitte Mahayni

Mercator School of Management

Nikolaus Schweizer

Tilburg School of Economics and Management

Cathleen Sende

University of Duisburg-Essen - Mercator School of Management

Date Written: March 29, 2017

Abstract

We analyze the optimal insurance demand in a dynamic setup with two periods. In addition to the possibility to insure, the investor is allowed to transfer wealth between the two periods, i.e. she can save. While it is difficult to interpret the optimal saving and insurance decisions without disentangling time and risk preferences, we do so in a generalized mean variance setup. In this dynamic setup we state a natural way to separate between time and risk preferences by means of a variance decomposition. We show that we are in- deed able to disentangle the preferences. While the variance within the period where a loss can occur determines the optimal insurance level, the aversion against the variance between the expected wealth at different times gives the optimal savings decision. The results are tractable and easy to interpret.

Keywords: Precautionary saving, insurance, mean variance preferences

JEL Classification: D81, D91, E21

Suggested Citation

Branger, Nicole and Mahayni, Antje B. and Schweizer, Nikolaus and Sende, Cathleen, Precautionary Saving and Insurance Under Generalized Mean-Variance Preferences (March 29, 2017). Available at SSRN: https://ssrn.com/abstract=2942743 or http://dx.doi.org/10.2139/ssrn.2942743

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Antje B. Mahayni

Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Nikolaus Schweizer

Tilburg School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

Cathleen Sende (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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