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Performance evaluation of optimized portfolio insurance strategies

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  • Zieling, Daniel
  • Mahayni, Antje
  • Balder, Sven
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    Abstract

    We use S&P 500 index return data for the time period 1985–2013 to evaluate the performance of portfolio insurance strategies. We shed light on the question if the performance of a constant proportion portfolio insurance (CPPI) strategy can be improved by means of a time-varying multiplier which depends on the estimated future volatility. Neglecting any inter-temporal hedging demand, the theoretical foundation of the strategies is given by maximizing the expected utility of a HARA investor in a diffusion model setup. If the risk premium is assumed to be proportional to the variance, the optimal strategy is a CPPI strategy. Otherwise, the multiple is time-varying (PPI). It turns out that even time-varying multiple strategies based on a rolling window of historical volatility estimates give a significant improvement of CPPI strategies. The out-performance is robust w.r.t. alternative performance measures and is also true for proportional transaction costs and adequate trigger trading.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426614001101
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 43 (2014)
    Issue (Month): C ()
    Pages: 212-225

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    Handle: RePEc:eee:jbfina:v:43:y:2014:i:c:p:212-225
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

    Keywords: Portfolio insurance; Performance evaluation; S&P 500; Regime switching EGARCH-M model; Transaction costs; Trigger trading; Gap risk;

    Find related papers by JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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