Stochastic dominance of portfolio insurance strategies

Rudi Zagst () and Julia Kraus ()

Annals of Operations Research, 2011, vol. 185, issue 1, 75-103

Abstract: The purpose of this article is to analyze and compare two standard portfolio insurance methods: Option-based Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance (CPPI). Various stochastic dominance criteria up to third order are considered. We derive parameter conditions implying the second- and third-order stochastic dominance of the CPPI strategy. In particular, restrictions on the CPPI multiplier resulting from the spread between the implied volatility and the empirical volatility are analyzed. Copyright Springer Science+Business Media, LLC 2011

Keywords: Portfolio insurance; CPPI; OBPI; Stochastic dominance; Volatility spread; Risk-averse investor (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (21)

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DOI: 10.1007/s10479-009-0549-9

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