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Stochastic dominance of portfolio insurance strategies

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  • Rudi Zagst
  • Julia Kraus

Abstract

The purpose of this article is to analyze and compare two standard portfolio insurance methods: Option-based Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance (CPPI). Various stochastic dominance criteria up to third order are considered. We derive parameter conditions implying the second- and third-order stochastic dominance of the CPPI strategy. In particular, restrictions on the CPPI multiplier resulting from the spread between the implied volatility and the empirical volatility are analyzed. Copyright Springer Science+Business Media, LLC 2011

Suggested Citation

  • Rudi Zagst & Julia Kraus, 2011. "Stochastic dominance of portfolio insurance strategies," Annals of Operations Research, Springer, vol. 185(1), pages 75-103, May.
    • Handle: RePEc:spr:annopr:v:185:y:2011:i:1:p:75-103:10.1007/s10479-009-0549-9
    DOI: 10.1007/s10479-009-0549-9
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    References listed on IDEAS

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    1. Philippe Bertrand & Jean-Luc Prigent & Jean-Pierre Lesne, 2001. "Portfolio Insurance: The Extreme Value Theory of the Cppi Method," Post-Print hal-01833134, HAL.
    2. Philippe Bertrand & Jean-Luc Prigent, 2005. "Portfolio Insurance Strategies: OBPI versus CPPI," Post-Print hal-01833077, HAL.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Richard Bookstaber & Joseph A. Langsam, 2000. "Portfolio insurance trading rules," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(1), pages 41-57, January.
    5. 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.
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    Cited by:

    1. Hamidi, Benjamin & Maillet, Bertrand & Prigent, Jean-Luc, 2014. "A dynamic autoregressive expectile for time-invariant portfolio protection strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 1-29.
    2. Zhang, Tao & Zhou, Hongfeng & Li, Larry & Gu, Feng, 2015. "Optimal rebalance rules for the constant proportion portfolio insurance strategy – Evidence from China," Economic Systems, Elsevier, vol. 39(3), pages 413-422.
    3. Sami Attaoui & Vincent Lacoste, 2013. "A scenario-based description of optimal American capital guaranteed strategies," Finance, Presses universitaires de Grenoble, vol. 34(2), pages 65-119.
    4. Olga Biedova & Victoria Steblovskaya, 2020. "Multiplier Optimization For Constant Proportion Portfolio Insurance (Cppi) Strategy," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-22, March.
    5. Ben Ameur, H. & Prigent, J.L., 2014. "Portfolio insurance: Gap risk under conditional multiples," European Journal of Operational Research, Elsevier, vol. 236(1), pages 238-253.
    6. Peyman Alipour & Ali Foroush Bastani, 2023. "Value-at-Risk-Based Portfolio Insurance: Performance Evaluation and Benchmarking Against CPPI in a Markov-Modulated Regime-Switching Market," Papers 2305.12539, arXiv.org.
    7. Chan, Raymond H. & Clark, Ephraim & Wong, Wing-Keung, 2012. "On the Third Order Stochastic Dominance for Risk-Averse and Risk-Seeking Investors," MPRA Paper 42676, University Library of Munich, Germany.
    8. Raquel M. Gaspar & Paulo M. Silva, 2019. "Investors’ Perspective on Portfolio InsuranceExpected Utility vs Prospect Theories," Working Papers REM 2019/92, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Raymond H. Chan & Ephraim Clark & Xu Guo & Wing-Keung Wong, 2020. "New development on the third-order stochastic dominance for risk-averse and risk-seeking investors with application in risk management," Risk Management, Palgrave Macmillan, vol. 22(2), pages 108-132, June.
    10. Chan, Raymond H. & Clark, Ephraim & Wong, Wing-Keung, 2016. "On the Third Order Stochastic Dominance for Risk-Averse and Risk-Seeking Investors with Analysis of their Traditional and Internet Stocks," MPRA Paper 75002, University Library of Munich, Germany.
    11. Tarik Driouchi & Lenos Trigeorgis & Raymond H. Y. So, 2018. "Option implied ambiguity and its information content: Evidence from the subprime crisis," Annals of Operations Research, Springer, vol. 262(2), pages 463-491, March.
    12. Jacques Pézier & Johanna Scheller, 2011. "A Comprehensive Evaluation of Portfolio Insurance Strategies," ICMA Centre Discussion Papers in Finance icma-dp2011-15, Henley Business School, University of Reading.
    13. Raquel M. Gaspar, 2016. "On Path–dependency of Constant Proportion Portfolio Insurance strategies," EcoMod2016 9381, EcoMod.
    14. Pézier, Jacques & Scheller, Johanna, 2013. "Best portfolio insurance for long-term investment strategies in realistic conditions," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 263-274.
    15. Xavier Warin, 2016. "The Asset Liability Management problem of a nuclear operator : a numerical stochastic optimization approach," Papers 1611.04877, arXiv.org.
    16. Yunna Wu & Chuanbo Xu & Hu Xu, 2016. "Optimal Site Selection of Tidal Power Plants Using a Novel Method: A Case in China," Energies, MDPI, vol. 9(10), pages 1-26, October.
    17. Raquel M. Gaspar & Paulo M. Silva, 2023. "Investors’ perspective on portfolio insurance," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 22(1), pages 49-79, January.
    18. L. Di Persio & I. Oliva. K. Wallbaum, 2019. "Options on CPPI with guaranteed minimum equity exposure," Papers 1902.06505, arXiv.org.
    19. 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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