Asset Prices and Insurance Loadings

We analyze an equilibrium model in which agents exposed to idiosyncraticrisk can purchase insurance policies in addition to financialassets. The price of an insurance contract depends nonlinearly on theclaims and explicitly contains safety loadings, proportional to variance.We consider random loading factors that vary with business cycles.To extract economic information from the equilibrium, we expandthe stochastic discount factor (SDF) in the volatility of consumptiongrowth, a natural small parameter. We obtain the true dependence ofthe SDF on idiosyncratic risk and insurance loadings[...]

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Year of publication:	2008-07-01
Authors:	Malamud, Semyon ; Trubowitz, Eugene
Institutions:	National Centre of Competence in ResearchFinancial Valuation and Risk Management
Subject:	Sicherheitszuschlag \| Hedge Fund \| Aktienkurs \| Gleichgewichtsmodell

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1 Introduction
2 Setup
3 Hedgeable filtration, hedgeable claims and the size of unhedgeableidiosyncratic risk
4 Market consistent pricing of insurance liabilities
5 The problem of individual optimal asset-insurance allocation
6 The law of large numbers and CRRA utilities
7 Optimal asset-insurance allocation for small idiosyncratic risk
8 Equilibria for weak uncertainty. Expansion in the size of uncer-tainty
9 Heterogeneous classes
10 Conditionally independent idiosyncratic shocks
11 Calibration with i.i.d. loadings and Markov endowment
12 Conclusions
Appendices:
A The derivatives of the optimal consumption and claims streams
B Expansion of the optimal consumption stream for small uncer-tainty
C Expansion of the SDF for geometric random walks
References

Persistent link: https://www.econbiz.de/10005868989