Safety First Portfolio Insurance

Mark Broadie and William Goetzmann

Yale School of Management Working Papers from Yale School of Management

Abstract: In this study, we show how a dynamic insurance program can be implemented within a mean-variance framework. The approach combines elements of the single period safety first idea suggested by Telser and developed by Leibowitz with multiperiod insurance strategies like CPPI and TIPP. The insurance program allows the user to set a probability of hitting a specified floor or target and also allows for changing risk attitudes through time. When the insurance strategy is tested on historical data, the insured portfolio achieves high long-term returns while mostly avoiding long bear markets. In order to understand how the insurance strategy might perform in the future, we simulate returns of the stock market and compare the insurance strategy to buy and hold strategies. An additional benefit of the safety first approach is that it specifies a strategy for underfunded portfolios as well as overfunded portfolios.

Keywords: insurance; Telser; risk; insurance portfolio Working Paper Series (search for similar items in EconPapers)
Date: 2008-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2632

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