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Evolutionary Portfolio Selection with Liquidity Shocks


Giorgi, Enrico De (2004). Evolutionary Portfolio Selection with Liquidity Shocks. Working paper series / Institute for Empirical Research in Economics No. 185, University of Zurich.

Abstract

Insurance companies invest their wealth in financial markets. The wealth evolution strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavourable years, when indemnities to be paid to thenclients exceed collected premia. An investment strategy that does not take liquidity shocks into account, exposes insurance companies to the risk of bankruptcy, when liquidity shocks and low investment payoffs jointly appear. Therefore, regulatory authorities impose solvency restrictions to ensure that insurance companies are able tonface their obligations with high probability. This paper analyses the behaviour 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 for the investment strategies and we characterize trading strategies that are evolutionary stable, i.e. able to drive out any mutation.

Abstract

Insurance companies invest their wealth in financial markets. The wealth evolution strongly depends on the success of their investment strategies, but also on liquidity shocks which occur during unfavourable years, when indemnities to be paid to thenclients exceed collected premia. An investment strategy that does not take liquidity shocks into account, exposes insurance companies to the risk of bankruptcy, when liquidity shocks and low investment payoffs jointly appear. Therefore, regulatory authorities impose solvency restrictions to ensure that insurance companies are able tonface their obligations with high probability. This paper analyses the behaviour 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 for the investment strategies and we characterize trading strategies that are evolutionary stable, i.e. able to drive out any mutation.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:May 2004
Deposited On:29 Nov 2011 22:32
Last Modified:07 Dec 2017 10:09
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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