On the Demand for Portfolio Insurance. Issue 2 (21st October 2013)

• Record Type: Journal Article
• Authors: Fodor, Andy; Doran, James S.; Carson, James M.; Kirch, David P.
• Is Part Of: Risk management and insurance review. Volume 16:Issue 2(2013)
• Page Start: 167
• Page End: 193
• Publication Date: 2013-10-21
• Subjects: Risk (Insurance) -- Periodicals; Risk management -- Periodicals; Risk (Insurance) -- United States -- Periodicals; Risk management -- United States -- Periodicals; 368
• DOI: 10.1111/rmir.12009
• Languages: English
• ISSNs: 1098-1616

Abstract

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.