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The impact of illiquidity on the asset management of insurance companies

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  • Berry-Stölzle, Thomas R.
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    Abstract

    This paper investigates optimal asset management strategies for property and casualty insurance companies in illiquid markets. Using a cash-flow based liquidation model of an insurance company, we consider the effects of permanent and temporary price impact as well as commonality in price impact. Focusing on the interaction of a single large investor with the financial market makes the main results generally applicable for any institutional investor with stochastic future liabilities and restrictions on short-sales and financial leverage. Our analysis reveals a clear diversification benefit in illiquid markets apart from the one introduced by Markowitz [Markowitz, H., 1952. Portfolio selection. J. Financ. 7, 77-91]. In the presence of commonality, cash-flow matching is shown to be the optimal strategy for a large investor.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 43 (2008)
    Issue (Month): 1 (August)
    Pages: 1-14

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    Handle: RePEc:eee:insuma:v:43:y:2008:i:1:p:1-14

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    Web page: http://www.elsevier.com/locate/inca/505554

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