One-Dimensional Pricing of CPPI
Louis Paulot and
Xavier Lacroze
Applied Mathematical Finance, 2011, vol. 18, issue 3, 207-225
Abstract:
Constant Proportion Portfolio Insurance (CPPI) is an investment strategy designed to give participation in the performance of a risky asset while protecting the invested capital. This protection is, however, not perfect and the gap risk must be quantified. CPPI strategies are path dependent and may have American exercise which makes their valuation complex. A naive description of the state of the portfolio would involve three or even four variables. In this article we prove that the system can be described as a discrete-time Markov process in one single variable if the underlying asset follows a process with independent increments. This yields an efficient pricing scheme using transition probabilities. Our framework is flexible enough to handle most features of traded CPPIs including profit lock-in and other kinds of strategies with discrete-time reallocation.
Keywords: CPPI; portfolio insurance; option; pricing; gap risk; markov (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/1350486X.2010.486571 (text/html)
Access to full text is restricted to subscribers.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:18:y:2011:i:3:p:207-225
Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20
DOI: 10.1080/1350486X.2010.486571
Access Statistics for this article
Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger
More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().