Can a path-dependent strategy outperform a path-independent strategy?

Huai-I Lee, Tsung-Yu Hsieh, Wen-Hsiu Kuo and Hsinan Hsu

The Quarterly Review of Economics and Finance, 2015, vol. 58, issue C, 119-127

Abstract: The question of whether a path-independent strategy can outperform a path-dependent one has given rise to an interesting debate within the finance literature. This paper uses a protective put as an example and shows that by embedding a cost-down method into our approach, a path-dependent strategy may well outperform a path-independent one. The simulation results illustrate that our proposed protective put outperforms a classical protective put, exhibiting superior capabilities in terms of capturing upside potential, leading to higher Sharpe ratios and Sortino ratios, and avoiding insolvency. The results obtained from our sensitivity analysis provide further confirmation of the robustness of our simulation findings.

Keywords: Equity-linked investment products; Protective put; Strike price; Guaranteed investment products; Barrier options (search for similar items in EconPapers)
JEL-codes: D46 G11 G12 G19 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:58:y:2015:i:c:p:119-127

DOI: 10.1016/j.qref.2015.01.004

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