Evolutionary Portfolio Selection with Liquidity Shocks
AbstractInsurance companies invest their wealth in financial markets. The wealth evolution strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavourable 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, when liquidity shocks and low investment payoffs jointly appear. Therefore, regulatory au- thorities impose solvency restrictions to ensure that insurance companies are able to face their obligations with high probability. This paper analyses the behaviour of in- surance 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 for the investment strategies and we characterize trading strategies that are evolutionary stable, i.e. able to drive out any mutation.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 185.
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insurance; portfolio theory; evolutionary finance;
Other versions of this item:
- De Giorgi, Enrico, 2008. "Evolutionary portfolio selection with liquidity shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1088-1119, April.
- Enrico De Giorgi, 2005. "Evolutionary Portfolio Selection with Liquidity Shocks," Computing in Economics and Finance 2005 15, Society for Computational Economics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-05-26 (All new papers)
- NEP-EVO-2004-05-16 (Evolutionary Economics)
- NEP-EVO-2004-05-26 (Evolutionary Economics)
- NEP-FIN-2004-05-26 (Finance)
- NEP-FMK-2004-05-26 (Financial Markets)
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