A Comprehensive Evaluation of Portfolio Insurance Strategies

Jacques Pézier and Johanna Scheller
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Jacques Pézier: ICMA Centre, Henley Business School, University of Reading
Johanna Scheller: ICMA Centre, Henley Business School, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We present a comprehensive framework for comparing the merits of alternative portfolio insurance strategies in realistic contexts. Our findings add generality to previous results comparing option based and constant proportionality portfolio insurance strategies (OBPI and CPPI). The optimal OBPI and CPPI payoffs are determined by maximising expected utilities, with various degrees of risk sensitivity and over several investment horizons, using a general, two-parameter HARA utility. We consider two cases: either defined payoffs are purchased at fair prices or, as is typical in the implementation of portfolio insurance strategies, replicated discretely. The price dynamics of risky assets are modelled with either a geometric Brownian process or a time-changed geometric Brownian. Our results confirm the superiority of CPPI over OBPI in all cases. The effects of discrete replication and discontinuous price processes are examined by simulation and compared to the purchase at fair price of the theoretically optimal CPPI payoff when the underlying process is geometric Brownian.

Keywords: Capital guaranteed products; constant proportionality portfolio insurance; option based portfolio insurance; jump processes; time-changed Brownian motion; dynamic replication; utility theory. (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2011-06
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Citations: View citations in EconPapers (3)

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