The impact of illiquidity on the asset management of insurance companies |
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Authors: | Thomas R Berry-Stölzle |
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Institution: | Terry College of Business, University of Georgia, 206 Brooks Hall, Athens, GA 30602, United States |
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Abstract: | This paper investigates optimal asset management strategies for property and casualty insurance companies in illiquid markets. Using a cash-flow based liquidation model of an insurance company, we consider the effects of permanent and temporary price impact as well as commonality in price impact. Focusing on the interaction of a single large investor with the financial market makes the main results generally applicable for any institutional investor with stochastic future liabilities and restrictions on short-sales and financial leverage. Our analysis reveals a clear diversification benefit in illiquid markets apart from the one introduced by Markowitz Markowitz, H., 1952. Portfolio selection. J. Financ. 7, 77-91]. In the presence of commonality, cash-flow matching is shown to be the optimal strategy for a large investor. |
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Keywords: | G11 G12 G22 C61 |
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