Comprehensive comparison of dynamic portfolio insurance strategies under different market conditions

This paper backtests the performance of the two main dynamic portfolio insurance strategies, the option based portfolio insurance (OBPI) with synthetic puts and the constant proportion portfolio in- surance (CPPI) applied on the French index CAC40 for the period from 1/1/2004 to 1/9/2011. The strategies are compared relatively to each other under di erent market conditions. The comparison is conducted using three types of criteria: return criteria, risk criteria and investor preferences criteria. The results showed neither OBPI nor CPPI outperforms the other in terms of terminal portfolio value and payo s. Neither of OBPI or CPPI returns stochastically dom- inate the other at rst order. The Vega function analysis showed that the OBPI is much more sensitive to the underlying risky asset volatility than CPPI where the sensitivity is negative and becomes more negative with higher multiples. In terms of oor protection CPPI dominated OBPI in a bearish market and has been domi- nated by OBPI in bullish and no trend markets. In terms of the cost of insurance, the CPPI dominated OBPI and provided lower cost of insurance at the majority of cases. In conclusion, although the CPPI did not outperform the synthetic put OBPI in terms of returns it does outperform it in terms of risk, oor protection in bearish market and cost of insurance what explains the popularity that CPPI has recently attained in research work and in practice.