Equilibrium analysis of portfolio insurance

Article Abstract:

A martingale approach is used to characterize general equilibrium in the presence of portfolio insurance. Insurers sell to noninsurers in bad states, and general equilibrium requires that the risk premium rises to induce noninsurers to increase their holdings. We show that portfolio insurance increases price volatility, causes mean reversion in asset returns, raises the Sharpe ratio and volatility in bad states, and causes volatility to be correlated with volume. We also explain why out-of-the-money S&P 500 put options trade at a higher volatility than do in-the-money puts. (Reprinted by permission of the publisher.)

Commercial Banks, Investment Banking and Securities Dealing, Insurance carriers, not elsewhere classified, Insurance NEC, Other Direct Insurance (except Life, Health, and Medical) Carriers, Portfolio & Funds Management, Research, Insurance, Portfolio management, Martingales (Mathematics), Portfolio insurance

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Margin regulation and stock market volatility

Article Abstract:

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a,b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility. (Reprinted by permission of the publisher.)

Laws, regulations and rules, Stock-exchange, Stock exchanges, United States. Federal Reserve Board, Margins (Security trading), Margins (Securities trading)

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