Model-free CPPI

Alexander Schied

Journal of Economic Dynamics and Control, 2014, vol. 40, issue C, 84-94

Abstract: We consider Constant Proportion Portfolio Insurance (CPPI) and its dynamic extension, which may be called Dynamic Proportion Portfolio Insurance (DPPI). It is shown that these investment strategies work within the setting of Föllmer's pathwise Itô calculus, which makes no probabilistic assumptions whatsoever. This shows, on one hand, that CPPI and DPPI are completely independent of any choice of a particular model for the dynamics of asset prices. They even make sense beyond the class of semimartingale sample paths and can be successfully defined for models admitting arbitrage, including some models based on fractional Brownian motion. On the other hand, the result can be seen as a case study for the general issue of robustness in the face of model uncertainty in finance.

Keywords: CPPI; DPPI; Model uncertainty; Knightian uncertainty; Föllmer's pathwise Itô calculus; Robustness; Pathwise trading strategies (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:40:y:2014:i:c:p:84-94

DOI: 10.1016/j.jedc.2013.12.010

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