The authors find that gap risk is more prominent when insurance is applied to a stock than to a portfolio, but it can be reduced by implementing time-invariant portfolio protection or by letting the multiplier decrease when volatility rises. However, option-based insurance with dynamic option replication has a large probability of breaching, no matter the underlying asset. Among diversified portfolios, minimum variance portfolios minimize the opportunity cost of insurance, but the ranking of diversified portfolios in terms of long-term returns does not appear to be disturbed by insurance.
This research has benefited from the support of FirstRand in the context of the “Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals” research chair at EDHEC-Risk Institute.
|Type :||Academic Publication|
|Editor :||The Journal of Portfolio Management November 2021, Vol. 47, Issue 10 Special Real Estate Issue 2021|