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The Impact of Large Portfolio Insurers on Asset Prices

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  • Donaldson, R Glen
  • Uhlig, Harald

Abstract

The authors develop a simple model in which the presence of portfolio insurers in a market of risk-averse traders leads to multiple equilibria for the pricing of financial assets and can cause an increase in volatility, including insurance-induced price drops. They demonstrate, however, that centralized portfolio insurance firms may actually reduce, not increase, volatility even if the existence of these firms increases the total amount of funds under insurance. Copyright 1993 by American Finance Association.

Suggested Citation

  • Donaldson, R Glen & Uhlig, Harald, 1993. "The Impact of Large Portfolio Insurers on Asset Prices," Journal of Finance, American Finance Association, vol. 48(5), pages 1943-1955, December.
    • Handle: RePEc:bla:jfinan:v:48:y:1993:i:5:p:1943-55
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    Cited by:

    1. Antonio E. Bernardo & Ivo Welch, 2004. "Liquidity and Financial Market Runs," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 135-158.
    2. Joel M. Vanden, 2006. "Portfolio Insurance And Volatility Regime Switching," Mathematical Finance, Wiley Blackwell, vol. 16(2), pages 387-417, April.
    3. Elettra Agliardi & Rainer Andergassen, 2007. "(S,S)-Adjustment Strategies And Dynamic Hedging," Working Paper series 09_07, Rimini Centre for Economic Analysis.
    4. Basak, Suleyman, 2002. "A comparative study of portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1217-1241, July.

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