Portfolio insurance and volatility Regime switching

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

A new equilibrium model of portfolio insurance is presented in order to study the volatility effects of dynamic insurance strategies. While prior research has focused on the relationship between portfolio insurance and the overall level of market volatility, this article shows that the salient feature of portfolio insurance is volatility regime switching. Regime switching is shown to be a necessary condition for portfolio insurance, which provides a new explanation for the pervasive volatility clustering effect that is found in most equity markets. The equilibrium involves a free boundary and the local time of the equilibrium price process at the free boundary plays an important role in solving the model.

Original languageEnglish (US)
Pages (from-to)387-417
Number of pages31
JournalMathematical Finance
Volume16
Issue number2
DOIs
StatePublished - Apr 1 2006

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Applied Mathematics

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