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Evolutionary portfolio selection with liquidity shocks

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  • De Giorgi, Enrico

Abstract

The wealth dynamics of insurance companies strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavorable years, when indemnities to be paid to the clients exceed collected premia. An investment strategy that does not take liquidity shocks into account, exposes insurance companies to the risk of bankruptcy. This paper analyzes the behavior of insurance companies in an evolutionary framework. We show that an insurance company that merely satisfies regulatory constraints will eventually vanish from the market. We give a more restrictive no-bankruptcy condition on investment strategies. Moreover, we characterize trading strategies that are evolutionary stable, i.e., able to drive out any mutation. We study the existence of such strategies and the conditions under which financial and insurance markets are stable.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 4 (April)
Pages: 1088-1119

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:4:p:1088-1119

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  1. Igor Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2003. "Evolutionary Stable Stock Markets," Discussion Papers 03-39, University of Copenhagen. Department of Economics.
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  15. Paul Embrechts, 1996. "Actuarial versus Financial Pricing of Insurance," Center for Financial Institutions Working Papers 96-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
  16. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.
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  18. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, September.
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Cited by:
  1. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CREMA Working Paper Series 2004-23, Center for Research in Economics, Management and the Arts (CREMA).

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