PORTFOLIO INSURANCE UNDER ROUGH VOLATILITY AND VOLTERRA PROCESSES

Jean-Loup Dupret and Donatien Hainaut ()
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Jean-Loup Dupret: LIDAM-ISBA, UCLouvain, Voie du Roman Pays 20, Louvain-La-Neuve, 1348, Belgium
Donatien Hainaut: LIDAM-ISBA, UCLouvain, Voie du Roman Pays 20, Louvain-La-Neuve, 1348, Belgium

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 06n07, 1-35

Abstract: Affine Volterra processes have gained more and more interest in recent years. In particular, this class of processes generalizes the classical Heston model and the more recent rough Heston model. The aim of this work is hence to revisit and generalize the constant proportion portfolio insurance (CPPI) under affine Volterra processes. Indeed, existing simulation-based methods for CPPI do not apply easily to this class of processes. We instead propose an approach based on the characteristic function of the log-cushion which appears to be more consistent, stable and particularly efficient in the case of saffine Volterra processes compared with the existing simulation techniques. Using such approach, we describe in this paper several properties of CPPI which naturally result from the form of the log-cushion’s characteristic function under affine Volterra processes. This allows to consider more realistic dynamics for the underlying risky asset in the context of CPPI and hence build portfolio strategies that are more consistent with financial data. In particular, we address the case of the rough Heston model, known to be extremely consistent with past data of volatility. By providing a new estimation procedure for its parameters based on the PMCMC algorithm, we manage to study more accurately the true properties of such CPPI strategy and to better handle the risk associated with it.

Keywords: Portfolio insurance; CPPI; Volterra process; rough volatility; particle Monte–Carlo Markov chain (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219024921500369

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