IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_2260.html
   My bibliography  Save this paper

Property Insurance, Portfolio Selection and their Interdependence

Author

Listed:
  • Fwu-Ranq Chang

Abstract

This paper studies the interdependence between property insurance and portfolio selection. The insurance premium of property loss is shown to play the role of subsistence consumption in the analysis. Then, “security” becomes a necessity good and an increase in any insurance parameter would make the investor more “conservative.” The effect of a stock market parameter on the marginal propensity to insure is shown to be opposite that on the marginal propensity to consume. Consequently, an increase in volatility would encourage those with a greater-than-unity relative risk aversion to purchase more insurance at the expense of current consumption.

Suggested Citation

  • Fwu-Ranq Chang, 2008. "Property Insurance, Portfolio Selection and their Interdependence," CESifo Working Paper Series 2260, CESifo.
  • Handle: RePEc:ces:ceswps:_2260
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp2260.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dionne, Georges & Eeckhoudt, Louis, 1984. "Insurance and saving: some further results," Insurance: Mathematics and Economics, Elsevier, vol. 3(2), pages 101-110, April.
    2. Chang,Fwu-Ranq, 2009. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, number 9780521541947, November.
    3. Vila, Jean-Luc & Zariphopoulou, Thaleia, 1997. "Optimal Consumption and Portfolio Choice with Borrowing Constraints," Journal of Economic Theory, Elsevier, vol. 77(2), pages 402-431, December.
    4. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    5. Mayers, David & Smith, Clifford W, Jr, 1983. "The Interdependence of Individual Portfolio Decisions and the Demand for Insurance," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 304-311, April.
    6. Christian Gollier, 2003. "To Insure or Not to Insure?: An Insurance Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 5-24, June.
    7. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    8. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    9. Ioannis Karatzas & John P. Lehoczky & Suresh P. Sethi & Steven E. Shreve, 1986. "Explicit Solution of a General Consumption/Investment Problem," Mathematics of Operations Research, INFORMS, vol. 11(2), pages 261-294, May.
    10. Jerusalem D. Levhari & T. N. Srinivasan, 1969. "Optimal Savings under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(2), pages 153-163.
    11. R.A. Somerville, 2004. "Insurance, Consumption, and Saving: A Dynamic Analysis in Continuous Time," American Economic Review, American Economic Association, vol. 94(4), pages 1130-1140, September.
    12. Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
    13. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hun Seog, S. & Hong, Jimin, 2022. "Market insurance and endogenous saving with multiple loss states," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schwartz, Eduardo S & Tebaldi, Claudio, 2004. "Illiquid Assets and Optimal Portfolio Choice," University of California at Los Angeles, Anderson Graduate School of Management qt7q65t12x, Anderson Graduate School of Management, UCLA.
    2. Servaas van Bilsen & Roger J. A. Laeven & Theo E. Nijman, 2020. "Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level," Management Science, INFORMS, vol. 66(9), pages 3927-3955, September.
    3. van Bilsen, Servaas & Laeven, Roger J.A., 2020. "Dynamic consumption and portfolio choice under prospect theory," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 224-237.
    4. Castaneda, Pablo & Rudolph, Heinz P., 2011. "Upgrading investment regulations in second pillar pension systems : a proposal for Colombia," Policy Research Working Paper Series 5775, The World Bank.
    5. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2016, January-A.
    6. Letendre, Marc-Andre & Smith, Gregor W., 2001. "Precautionary saving and portfolio allocation: DP by GMM," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 197-215, August.
    7. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 32, July-Dece.
    8. Lin, Wen-chang & Lu, Jin-ray, 2012. "Risky asset allocation and consumption rule in the presence of background risk and insurance markets," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 150-158.
    9. Penaranda, Francisco, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
    10. Doriana Ruffino, 2014. "Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 107-130, January.
    11. Jouini, Elyes, 2001. "Arbitrage and control problems in finance: A presentation," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 167-183, April.
    12. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    13. Zvi Bodie & Jérôme Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
    14. Hun Seog, S. & Hong, Jimin, 2022. "Market insurance and endogenous saving with multiple loss states," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    15. Constantinos Kardaras & Gordan Zitkovic, 2007. "Stability of the utility maximization problem with random endowment in incomplete markets," Papers 0706.0482, arXiv.org, revised Mar 2010.
    16. Pablo Castañeda & Heinz Rudolph, 2010. "Portfolio Choice, Minimum Return Guarantees, and Competition in DC Pension Systems," Working Papers 39, Superintendencia de Pensiones, revised Feb 2010.
    17. Chen, Zheng & Li, Zhongfei & Zeng, Yan & Sun, Jingyun, 2017. "Asset allocation under loss aversion and minimum performance constraint in a DC pension plan with inflation risk," Insurance: Mathematics and Economics, Elsevier, vol. 75(C), pages 137-150.
    18. Paul Willen & Felix Kubler, 2006. "Collateralized Borrowing and Life-Cycle Portfolio Choice," NBER Working Papers 12309, National Bureau of Economic Research, Inc.
    19. Zvi Bodie & Jonathan Treussard & Paul S. Willen, 2007. "The theory of life-cycle saving and investing," Public Policy Discussion Paper 07-3, Federal Reserve Bank of Boston.
    20. Mahan Tahvildari, 2021. "Forward indifference valuation and hedging of basis risk under partial information," Papers 2101.00251, arXiv.org.

    More about this item

    Keywords

    insurance premium; subsistence consumption; portfolio substitution; optimal saving under uncertainty;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2260. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.