On the optimality of portfolio insurance
Article Abstract:
The optimality of an insurance strategy in which the investor buys a risky asset and a put on the asset is examined, with the striking price of the put serving as the insurance level. While it is unlikely that an investor would use this strategy in complete markets, investors may choose to buy a put on the risky asset in some kinds of less-complete markets. The investor may purchase the put to introduce a risk-free asset into the portfolio given only a risky asset, a put, and non-continuous trading, and if a risk-free asset exists and the utility function of the investor shows constant proportional risk-aversion, the investor can buy the risk-free asset directly and not buy a put. It is concluded that an investor would find an insurance strategy optimal only in the most incomplete of markets.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1985
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A rational expectations model of term premia with some implications for empirical asset demand equations
Article Abstract:
The equilibrium time series processes that characterize the prices of bonds that differ by maturity using the capital asset pricing model relationship between expected returns is derived. The rational expectations assumption requires that asset behavior determining bond prices in equilibrium be based on the covariances among returns implied by the market clearing assumption. Nonlinear restrictions are imposed by this assumption on the parameters in the bond prices solution, with some implications for the kinds of comparative static exercises that allow assumptions of invariant demand functions discussed, and numerical solutions for bond prices derived.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1985
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Risk aversion and arbitrage
Article Abstract:
Conditions under which asset returns and consumption are consistent with risk-averse preferences are characterized, with it shown that risk aversion is equivalent to what is called zero arbitrage on a transformation of the payoff space. It is possible to interpret the implicit state prices dual to the no-arbitrage condition as prices of what are called pure consumption hedges. The usual restrictions associated with non-satiation are implied by the zero-arbitrage restriction, and the analysis is shown to hold in both complete and incomplete market settings.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1985
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