Portfolio insurance with ratcheted floor as a long-term asset management strategy: implications of loss aversion

Huai-I. Lee, Hsinan Hsu, Len-Kuo Hu and Ching-Chung Lin

Applied Economics Letters, 2011, vol. 18, issue 15, 1449-1454

Abstract: The existing literature has revealed that the performance of current portfolio insurance strategies as long-term asset management is limited. Prospect theory implies that creation of ladder return distributions by portfolio insurance can improve long-term asset management with criteria of loss avoidance and gain protection. Based on this principle, we propose the Ratcheted Floor Variable Proportion Portfolio Insurance (RF-VPPI) as a competing strategy with the Constant Proportion Portfolio Insurance (CPPI) and rolling-CPPI strategies. Simulations and empirical tests demonstrate that the RF-VPPI outperforms the CPPI and the rolling-CPPI in the long term.

Date: 2011
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DOI: 10.1080/13504851.2010.543062

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