The Impact of Large Portfolio Insurers on Asset Prices
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- Author(s): R. GLEN DONALDSON, HARALD UHLIG
- Published: Apr 30, 2012
- Pages: 1943-1955
- DOI: 10.1111/j.1540-6261.1993.tb05135.x
We 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. We 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.