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Can a path-dependent strategy outperform a path-independent strategy?

Author

Listed:
  • Lee, Huai-I
  • Hsieh, Tsung-Yu
  • Kuo, Wen-Hsiu
  • Hsu, Hsinan

Abstract

The question of whether a path-independent strategy can outperform a path-dependent one has given rise to an interesting debate within the finance literature. This paper uses a protective put as an example and shows that by embedding a cost-down method into our approach, a path-dependent strategy may well outperform a path-independent one. The simulation results illustrate that our proposed protective put outperforms a classical protective put, exhibiting superior capabilities in terms of capturing upside potential, leading to higher Sharpe ratios and Sortino ratios, and avoiding insolvency. The results obtained from our sensitivity analysis provide further confirmation of the robustness of our simulation findings.

Suggested Citation

  • Lee, Huai-I & Hsieh, Tsung-Yu & Kuo, Wen-Hsiu & Hsu, Hsinan, 2015. "Can a path-dependent strategy outperform a path-independent strategy?," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 119-127.
    • Handle: RePEc:eee:quaeco:v:58:y:2015:i:c:p:119-127
    DOI: 10.1016/j.qref.2015.01.004
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    More about this item

    Keywords

    Equity-linked investment products; Protective put; Strike price; Guaranteed investment products; Barrier options;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory

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