Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5077448 | Insurance: Mathematics and Economics | 2008 | 14 Pages |
Abstract
This paper investigates optimal asset management strategies for property and casualty insurance companies in illiquid markets. Using a cash-flow based liquidation model of an insurance company, we consider the effects of permanent and temporary price impact as well as commonality in price impact. Focusing on the interaction of a single large investor with the financial market makes the main results generally applicable for any institutional investor with stochastic future liabilities and restrictions on short-sales and financial leverage. Our analysis reveals a clear diversification benefit in illiquid markets apart from the one introduced by Markowitz [Markowitz, H., 1952. Portfolio selection. J. Financ. 7, 77-91]. In the presence of commonality, cash-flow matching is shown to be the optimal strategy for a large investor.
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Thomas R. Berry-Stölzle,