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Risk management of time varying floors for dynamic portfolio insurance

Author

Listed:
  • H. Ben Ameur
  • Jean-Luc Prigent

    (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

We propose several important extensions of the standard Constant Proportion Portfolio Insurance (CPPI), which are based on the introduction of various conditional floors. In this framework, we examine in particular both the margin and the ratchet based strategies. The first method prevents the portfolio from being monetized, known as the cash-lock risk; the second one allows to keep part of the past gains whatever the future significant drawdowns of the financial market, which corresponds to ratchet effects. However, as for the standard CPPI method, the investor can benefit from potential market rises. To control the risk of such strategies, we introduce risk measures based both on quantile conditions and on the Expected Shortfall (ES). For each of these criteria, we prove that the conditional floor must be higher than a lower bound. We illustrate the advantages provided by such strategies, using a quite general ARCH type model. Our empirical analysis is mainly conducted on S&P 500 and Euro Stoxx 50. Using parameter estimation, we provide portfolio simulations and measure their respective performances using both the Sharpe and the Omega ratios. We also backtest the strategies, using a sliding window method to dynamically estimate the parameters of the models based on the last two years of weekly returns. Our results emphazise the advantages of introducing time varying floors from both the theoretical and operational points of view.
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Suggested Citation

  • H. Ben Ameur & Jean-Luc Prigent, 2018. "Risk management of time varying floors for dynamic portfolio insurance," Post-Print hal-03679408, HAL.
    • Handle: RePEc:hal:journl:hal-03679408
    DOI: 10.1016/j.ejor.2018.01.041
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    Cited by:

    1. Dupret, Jean-Loup & Hainaut, Donatien, 2021. "Portfolio insurance under rough volatility and Volterra processes," LIDAM Discussion Papers ISBA 2021026, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    2. Manjeevan Seera & Chee Peng Lim & Ajay Kumar & Lalitha Dhamotharan & Kim Hua Tan, 2024. "An intelligent payment card fraud detection system," Annals of Operations Research, Springer, vol. 334(1), pages 445-467, March.
    3. Gerrard, Russell & Kyriakou, Ioannis & Nielsen, Jens Perch & Vodička, Peter, 2023. "On optimal constrained investment strategies for long-term savers in stochastic environments and probability hedging," European Journal of Operational Research, Elsevier, vol. 307(2), pages 948-962.
    4. Killian Pluzanski & Jean-Luc Prigent, 2023. "Risk management of margin based portfolio strategies for dynamic portfolio insurance with minimum market exposure," Thema Working Papers 2023-22, THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS.
    5. Peyman Alipour & Ali Foroush Bastani, 2023. "Value-at-Risk-Based Portfolio Insurance: Performance Evaluation and Benchmarking Against CPPI in a Markov-Modulated Regime-Switching Market," Papers 2305.12539, arXiv.org.

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