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The effectiveness of the VaR-based portfolio insurance strategy: An empirical analysis

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  • Jiang, Chonghui
  • Ma, Yongkai
  • An, Yunbi
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    Abstract

    This paper proposes an approach to constructing the insured portfolios under the VaR-based portfolio insurance strategy (VBPI) and provides a comprehensive analysis of its hedging effectiveness in comparison with the buy-and-hold (B&H) as well as the constant proportion portfolio insurance (CPPI) strategies in the context of the Chinese market. The results show that both of the insurance strategies are able to limit the downward returns while retaining certain upside returns, and their capabilities of reshaping the return distributions increase as the guarantee or the confidence level rises. In general, the VBPI strategy tends to outperform the CPPI strategy in terms of both the degree of downside protection and the return performance.

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    File URL: http://www.sciencedirect.com/science/article/B6W4W-4W4CWTD-1/2/65bf7f937bda54eb3177e393ff2cd399
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 18 (2009)
    Issue (Month): 4 (September)
    Pages: 185-197

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    Handle: RePEc:eee:finana:v:18:y:2009:i:4:p:185-197

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Value-at-risk Portfolio insurance CPPI;

    References

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    1. Balder, Sven & Brandl, Michael & Mahayni, Antje, 2009. "Effectiveness of CPPI strategies under discrete-time trading," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 204-220, January.
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    7. Cesari, Riccardo & Cremonini, David, 2003. "Benchmarking, portfolio insurance and technical analysis: a Monte Carlo comparison of dynamic strategies of asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 987-1011, April.
    8. Koichi Matsumoto, 2007. "Portfolio Insurance with Liquidity Risk," Asia-Pacific Financial Markets, Springer, vol. 14(4), pages 363-386, December.
    9. Binh Huu Do, 2002. "Relative performance of dynamic portfolio insurance strategies: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(3), pages 279-296.
    10. Black, Fischer & Perold, AndreF., 1992. "Theory of constant proportion portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 403-426.
    11. Ian Domowitz & Jack Glen & Ananth Madhavan, 1998. "International Cross-Listing and Order Flow Migration: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 53(6), pages 2001-2027, December.
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    Cited by:
    1. Hedmilton Mourão Cardoso & Claudio Henrique da Silveira Barbedo & José Valentim Machado Vicente, 2012. "Dynamic strategies to optimize asset allocation: empirical evidence in the Brazilian market," Brazilian Business Review, Fucape Business School, vol. 9(2), pages 109-133, April.
    2. Dichtl, Hubert & Drobetz, Wolfgang, 2011. "Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1683-1697, July.
    3. Zieling, Daniel & Mahayni, Antje & Balder, Sven, 2014. "Performance evaluation of optimized portfolio insurance strategies," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 212-225.

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