insurance contracts often have a minimum interest rate guar-

antee as an integrated part of the contract. This guarantee

is an embedded put option issued by the institution to the

individual, who is forced to hold the option in the portfolio.

However, taking the inability to short this saving and other

institutional restrictions into account the individual may

actually face a restriction on the feasible set of portfolio

choices, hence be better o without such guarantees. We

measure the eect of the minimum interest guarantee con-

straint through the wealth equivalent and show that guar-

antees may induce a signi cant utility loss for relatively risk

tolerant investors.

We also consider the case with heterogenous investors sha-

ring a common portfolio. Investors with dierent risk atti-

tudes will experience a loss of utility by being forced to share

a common portfolio. However, the relatively risk averse in-

vestors are partly compensated by the minimum interest rate

guarantee, whereas the relatively risk tolerant investors are

suering a further utility loss.

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Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2000-1.

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Length: 31 pages
Date of creation: 12 Jan 2000
Date of revision:
Handle: RePEc:hhs:cbsfin:2000_001

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Related research

Keywords: Minimum interest rate guarantee; asset allo- cation restrictions; utility loss; wealth equivalent; heteroge- nous investors.;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

Cited by:
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1. Marie-Eve Lachance & Olivia S. Mitchell, 2002. "Understanding Individual Account Guarantees," NBER Working Papers 9195, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
   Other versions:
   • Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers wp035, University of Michigan, Michigan Retirement Research Center. [Downloadable!]

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