Evolutionary portfolio selection with liquidity shocks
Journal
Journal of Economic Dynamics and Control
ISSN
0165-1889
ISSN-Digital
1879-1743
Type
journal article
Date Issued
2008-04-01
Author(s)
Abstract
The wealth dynamics of insurance companies strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavorable years, when indemnities to be paid to the clients exceed collected premia. An investment strategy that does not take liquidity shocks into account, exposes insurance companies to the risk of bankruptcy.
This paper analyzes the behavior of insurance companies in an evolutionary framework. We show that an insurance company that merely satisfies regulatory constraints will eventually vanish from the market. We give a more restrictive no-bankruptcy condition on investment strategies. Moreover, we characterize trading strategies that are evolutionary stable, i.e., able to drive out any mutation. We study the existence of such strategies and the conditions under which financial and insurance markets are stable.
This paper analyzes the behavior of insurance companies in an evolutionary framework. We show that an insurance company that merely satisfies regulatory constraints will eventually vanish from the market. We give a more restrictive no-bankruptcy condition on investment strategies. Moreover, we characterize trading strategies that are evolutionary stable, i.e., able to drive out any mutation. We study the existence of such strategies and the conditions under which financial and insurance markets are stable.
Language
English
Keywords
Insurance
portfolio theory
evolutionary finance
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam [u.a.]
Volume
32
Number
4
Start page
1088
End page
1119
Pages
32
Subject(s)
Eprints ID
51193