Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products

Hubert Dichtl and Wolfgang Drobetz

Journal of Banking & Finance, 2011, vol. 35, issue 7, 1683-1697

Abstract: Portfolio insurance strategies are used on both the institutional and the retail side of the asset management industry. While standard utility theory struggles to provide an explanation, this study justifies the popularity of portfolio insurance strategies in a behavioral finance context. We run Monte Carlo simulations as well as historical simulations for popular portfolio insurance strategies and benchmark strategies in order to evaluate the outcomes using cumulative prospect theory. Our simulation results indicate that most portfolio insurance strategies are the preferred investment strategy for a prospect theory investor. Moreover, the analysis provides insights into how portfolio insurance products should be designed and structured to meet the preferences of prospect theory investors as accurately as possible.

Keywords: Portfolio; insurance; strategies; Prospect; theory; Monte; Carlo; simulation; Historical; simulation; Financial; product; design (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:7:p:1683-1697

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