Risk management of margin based portfolio strategies for dynamic portfolio insurance with minimum market exposure

We extend the standard Constant Proportion Portfolio Insurance (CPPI) by introducing simultaneously margin based dynamic strategies and constraints on minimum market expo- sure. This leads us to introduce specific conditional floors, allowing the portfolio of not being monetized (to avoid the cash-lock risk) while ensuring better participation in potential market increases. To control the risk of such strategies, we introduce risk measures based both on quantile conditions. Our empirical analysis is mainly conducted on S&P 500 and Euro Stoxx 50, by using Monte-Carlo experiments based on circular block boostrap method. This allows us to analyze the impact of the different parameters that define our CPPI strategies (i.e. CPPI multiple, successive margins, level of the minimum market exposure). We estimate and compare the cumulative distribution functions of the portfolio returns corresponding to the various insur- ance strategies that we investigate. We provide also their first four moments and measure their respective performances using both the Sharpe and the Omega ratios. Our results highlight the benefits of introducing time-varying floors associated to a decreasing sequence of margins while keeping the market exposure above a minimum level.