Minimum-cost portfolio insurance
AbstractMinimum-cost portfolio insurance is an investment strategy that enables an investor to avoid losses while still capturing gains of a payoff of a portfolio at minimum cost. If derivative markets are complete, then holding a put option in conjunction with the reference portfolio provides minimum-cost insurance at arbitrary arbitrage-free security prices. We derive a characterization of incomplete derivative markets in which the minimum-cost portfolio insurance is independent of arbitrage-free security prices. Our characterization relies on the theory of lattice-subspaces. We establish that a necessary and sufficient condition for price-independent minimum-cost portfolio insurance is that the asset span is a lattice-subspace of the space of contingent claims. If the asset span is a lattice-subspace, then the minimum-cost portfolio insurance can be easily calculated as a portfolio that replicates the targeted payoff in a subset of states which is the same for every reference portfolio.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 24 (2000)
Issue (Month): 11-12 (October)
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Web page: http://www.elsevier.com/locate/jedc
Other versions of this item:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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