Rubinstein the real world pitfalls of portfolio insurance. Portfolioinsurancekonzepte fur private wertpapierportfolios zur. Brokerage insurance such as the securities investor protection. Portfolio insurance was invented by hayne leland, john obrien and mark rubinstein in the 1970s, and eventually became wildly popular in the 80s as a. Heres one key factor that amplified the 1987 stockmarket. Portfolio reinsurance, also known as assumption reinsurance, may.
The top left quadrant is the pdf of the value of the cushion. The two main standard portfolio insurance methods are obpi and cppi. So risk pooling, the typical method of insurance, was not appropriate for portfolio insurance. The obpi method was introduced by leland and rubinstein 1976.
Pdf the evolution of portfolio insurance researchgate. The portfolio insurance strategy limits downside risk in falling markets, while it allows potential benefits in rising markets. Leland and rubinstein 1976 implemented the first portfolio insurance strategy called option based portfolio insurance obpi which combined a listed put and an investment in the underlying asset. In contrast with houses, when one portfolio burns down, virtually all others are likely to follow suit. Leland and mark rubinstein published in dynamic hedging.
The most popular portfolio insurance strategy is the syn thetic put approach of rubinstein and leland 1981. Rise in new form of portfolio insurance sparks fears. Research and analysis recent developments in portfolio insurance 37 the aim of this article is to describe how portfolio insurance works, the main strategies employed and how these have evolved over recent years, and the possible links between their use and financial market stability. Later, they together formed lelandrubinstein associates to develop the.
Portfolio insurance and stock marketrisk concern about stock market volatility has reached a record high. Portfolio insurance investment strategies econstor. It appeals rationally to investors who feel strongly, relative to other investors, that they cannot. Leland obrien rubinstein associates, inc portfolio. Option based portfolio insurance obpi, constant proportion portfolio. It is the option based portfolio insurance obpi, which consists of a portfolio invested in a risky. The first portfolio insurance strategies appeared at the end of the 70. A method of hedging a portfolio of stocks against the market risk by short selling stock index futures. The founders of the portfolio insurance concept are leland and rubinstein. A type of reinsurance contract in which an insurer has a large block of insurance policies reinsured. This paper defines the portfolio insurance strategy, provides examples and introduces some. Portfolio insurance is a popular application for dynamic hedging. A guide to portfolio insurance, edited by don luskin john wiley and sons, 1988 the. An option replication strategy is one of the optimal investment policies for the longterm investor and is widely discussed among academics and practitioners.
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