Minimum-Cost Portfolio Insurance

C. D. Aliprantis, Donald Brown () and J. Werner
Additional contact information
J. Werner: Postal: Prof. Jan Werner Department of Economics, University of Minnesota, 1012 Management and Economics, Minneapolis, MN 55455 U.S.A

Discussion Paper Serie A from University of Bonn, Germany

Abstract: Minimum-cost portfolio insurance is an investment strategy that enables an investor to avoid losses while still capturing gains of a payoff of a portfolio at minimum cost. If derivative markets are complete, then holding a put option in conjunction with the reference portfolio provides minimum-cost insurance at arbitrary arbitrage-free security prices. We derive a characterization of incomplete derivative markets in which the minimum-cost portfolio insurance is independent of arbitrage-free security prices. Our characterization relies on the theory of lattice-subspaces. We establish that a necessary and sufficient condition for price-independent minimum-cost portfolio insurance is that the asset span is a lattice-subspace of the space of contingent claims. If the asset span is a lattice-subspace, then the minimum-cost portfolio insurance can be easily calculated as a portfolio that replicates the targeted payoff in a subset of states which is the same for every reference portfolio.

Keywords: Portfolio insurance; derivative markets; lattice-subspace. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 1999-07

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Journal Article: Minimum-cost portfolio insurance (2000)
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