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Multiplier Optimization For Constant Proportion Portfolio Insurance (Cppi) Strategy

Author

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  • OLGA BIEDOVA

    (Department of Mathematical Sciences, Bentley University, 175 Forest Street, Waltham, MA 02452, USA)

  • VICTORIA STEBLOVSKAYA

    () (Department of Mathematical Sciences, Bentley University, 175 Forest Street, Waltham, MA 02452, USA)

Abstract

Constant proportion portfolio insurance (CPPI) strategy is a very popular investment solution which provides an investor with a capital protection as well as allows for an equity market participation. In this paper, we propose a two-step approach to the numerical optimization of the CPPI main parameter, multiplier. First, we identify an admissible range of the multiplier values by controlling the shortfall probability (chosen as a measure of the gap risk). Second, within the admissible range, we choose the optimal multiplier value with respect to the omega ratio (chosen as a performance measure). We illustrate the performance of our optimization algorithm on simulated CPPI paths in the Black–Scholes environment with discrete trading as well as on the historical S&P500 data using the block-bootstrap simulations.

Suggested Citation

  • 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.
  • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:02:n:s0219024920500119
    DOI: 10.1142/S0219024920500119
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    References listed on IDEAS

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