MULTIPLIER OPTIMIZATION FOR CONSTANT PROPORTION PORTFOLIO INSURANCE (CPPI) STRATEGY

Olga Biedova and Victoria Steblovskaya ()
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Olga Biedova: Department of Mathematical Sciences, Bentley University, 175 Forest Street, Waltham, MA 02452, USA
Victoria Steblovskaya: Department of Mathematical Sciences, Bentley University, 175 Forest Street, Waltham, MA 02452, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 02, 1-22

Abstract: Constant proportion portfolio insurance (CPPI) strategy is a very popular investment solution which provides an investor with a capital protection as well as allows for an equity market participation. In this paper, we propose a two-step approach to the numerical optimization of the CPPI main parameter, multiplier. First, we identify an admissible range of the multiplier values by controlling the shortfall probability (chosen as a measure of the gap risk). Second, within the admissible range, we choose the optimal multiplier value with respect to the omega ratio (chosen as a performance measure). We illustrate the performance of our optimization algorithm on simulated CPPI paths in the Black–Scholes environment with discrete trading as well as on the historical S&P500 data using the block-bootstrap simulations.

Keywords: CPPI strategy; multiplier; constrained optimization; gap risk; bootstrap simulations (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024920500119

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