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Do futures‐based strategies enhance dynamic portfolio insurance?

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  • Binh Huu Do
  • Robert W. Faff

Abstract

In this paper we investigate the relative performance of two approaches to dynamic portfolio insurance: the synthetic put and the Constant Proportion Portfolio Insurance (CPPI). The investigation is conducted on the Australian market, over a sample period of 59 non‐overlapping quarters from December 1987 to December 2002. Its main contribution is to provide a comprehensive assessment of the two approaches under different market conditions, and the testing of ex ante information as an input into the trading program. The major finding is that the futures‐based implementation of both synthetic put and the CPPI approach is robust to both tranquil and turbulent market conditions in preserving the desired floor. The fact that this conclusion includes the case of employing implied volatility (obtained from the options market) is highly encouraging as it suggests high implementability of the strategy. Notably, the risk‐return tradeoff shows that portfolio insurance using this volatility measure yields a return that is 64 basis points over the risk free investment. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:591–608, 2004

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  • Binh Huu Do & Robert W. Faff, 2004. "Do futures‐based strategies enhance dynamic portfolio insurance?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(6), pages 591-608, June.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:6:p:591-608
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    Cited by:

    1. 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.
    2. Lan-chih Ho & John Cadle & Michael Theobald, 2022. "Portfolio Insurance Strategies," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 62, pages 1437-1465, Springer.
    3. 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.
    4. Huai-I. Lee & Min-Hsien Chiang & Hsinan Hsu, 2008. "A new choice of dynamic asset management: the variable proportion portfolio insurance," Applied Economics, Taylor & Francis Journals, vol. 40(16), pages 2135-2146.
    5. Hubert Dichtl & Wolfgang Drobetz & Martin Wambach, 2017. "A bootstrap-based comparison of portfolio insurance strategies," The European Journal of Finance, Taylor & Francis Journals, vol. 23(1), pages 31-59, January.
    6. Hammadi Zouari, 2022. "On the Effectiveness of Stock Index Futures for Tail Risk Protection," International Journal of Economics and Financial Issues, Econjournals, vol. 12(3), pages 38-52, May.

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