Portfolio insurance forced clients to miss the entire market rebound after the crash

Evidence

The problem, though, was that many portfolio insurance accounts were then “stopped out.” They were in effect completely in cash (the futures sales needed to try to protect “floors” had been equivalent to the entire insured portfolio), and the only way in which LOR or the other portfolio insurers could continue to guarantee the “floor” was to leave them in that condition (see, for example, Rubinstein 1988, p. 40). Unless insurers’ clients were prepared to accept an ad hoc downward revision of their floors, they thus had entirely to forgo the benefits of subsequent stock-price rises. Given the extent to which stock prices recovered, that turned out to be a significant cost. — Donald MacKenzie, An Engine, Not a Camera, 843

Categorization

• XREF: A concrete instance of a model’s logic imposing real-world constraints — the mechanical ‘stop-out’ behavior, central to the performativity/mechanicity thesis. — connects to: Portfolio insurance largely protected client floors even during the 1987 crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 841; Portfolio insurance’s inventors concede it helped cause the 1987 crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 865; Portfolio insurance designed to limit losses can amplify market volatility. — Shapiro, Susan P., The Social Control of Impersonal Trust, 144 (+1 more)

Broader Connections

• Portfolio insurance largely protected client floors even during the 1987 crash #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 841
• Portfolio insurance’s inventors concede it helped cause the 1987 crash #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 865
• Portfolio insurance designed to limit losses can amplify market volatility. #expands (0.80) — Shapiro, Susan P., The Social Control of Impersonal Trust, 144
• Portfolio insurance creators accepted increased volatility as unproblematic #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 813