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Rev Fin 1995; 8:1059-1090
© 1995 the Society for Financial Studies

Article

A general equilibrium model of portfolio insurance

S Basak
Finance Department, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6367, USA

Abstract

This article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous-time model. Portfolio insurers are modeled as expected utility maximizing agents. Martingale methods are employed in solving the individual agents' dynamic consumption-portfolio problems. Comparisons are made between the optimal consumption processes, optimally invested wealth and portfolio strategies of the portfolio insurers and 'normal agents'. At a general equilibrium level, comparisons across economies reveal that the market volatility and risk premium are decreased, and the asset and market price levels increased, by the presence of portfolio insurance.


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