A general equilibrium model of portfolio insurance

This article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous-time model. Portfolio insurers are modeled as expected utility maximizing agents. Martingale methods are employed in solving the individual agents' dynamic consumption-portfolio problems. Comparisons are made between the optimal consumption processes, optimally invested wealth and portfolio strategies of the portfolio insurers and ''normal agents.'' At a general equilibrium level, comparisons across economies reveal that the market volatility and risk, premium are decreased, and the asset and market price levels increased, by the presence of portfolio insurance.