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Equity portfolio insurance against a benchmark: Setting, replication and optimality

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  • Bahaji, Hamza

Abstract

This paper undertakes the issue of portfolio insurance from the perspective of a risk-averse agent requiring his financial wealth to grow at a floored rate in excess of an equity benchmark. The suggested solution is a generalization of the CPPI approach within a two-equity asset framework. The paper examines some features of this extension related to its dynamic, its relative risk–reward profile and its static replication. It focuses more specifically on the optimal design of this portfolio strategy in the sense of consumption–investment decision making.

Suggested Citation

  • Bahaji, Hamza, 2014. "Equity portfolio insurance against a benchmark: Setting, replication and optimality," Economic Modelling, Elsevier, vol. 40(C), pages 382-391.
    • Handle: RePEc:eee:ecmode:v:40:y:2014:i:c:p:382-391
    DOI: 10.1016/j.econmod.2013.11.031
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    References listed on IDEAS

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    1. Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
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    3. Snorre Lindset, 2004. "Relative Guarantees," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(2), pages 187-209, December.
    4. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. Rama Cont & Peter Tankov, 2009. "Constant Proportion Portfolio Insurance In The Presence Of Jumps In Asset Prices," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 379-401, July.
    6. Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
    7. Philippe Bertrand & Jean-Luc Prigent, 2003. "Portfolio Insurance Strategies: A Comparison of Standard Methods When the Volatility of the Stock is Stochastic," Post-Print hal-01833118, HAL.
    8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Cited by:

    1. Zagst, Rudi & Kraus, Julia & Bertrand, Philippe, 2019. "Option-Based performance participation," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 44-61.
    2. Hentati-Kaffel, Rania, 2016. "Structured products under generalized kappa ratio," Economic Modelling, Elsevier, vol. 58(C), pages 599-614.

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    More about this item

    Keywords

    Portfolio insurance; Equity benchmark; Perpetual exchange options; Utility maximization;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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