Equilibrium of financial derivative markets under portfolio insurance constraints

•This paper examines the equilibrium of financial portfolios under insurance constraints on the terminal wealth.•The financial equilibrium is determined for quite general utility functions and insurance constraints•The results prove that derivative assets have to be introduced in the portfolio to maximize the expected utilities of investors.

This paper examines the equilibrium of financial portfolios under insurance constraints on terminal wealth. We consider a single period economy in which agents search to maximize the expected utilities of their wealth at maturity. Three main classes of financial assets are considered: a riskless asset (usually the bond), a risky asset (the stock) and European options of all strikes (corresponding to financial derivatives). Both partial and general optimal financial equilibria are determined and analyzed for quite general utility functions and insurance constraints.