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A Dynamic AutoRegressive Expectile for Time-Invariant Portfolio Protection Strategies

Author

Listed:
  • Benjamin Hamidi

    () (Neuflize OBC Investissements - Neuflize OBC Investissements)

  • Bertrand Maillet

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Jean-Luc Prigent

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

Abstract

"Constant proportion portfolio insurance" (CPPI) is nowadays one of the most popular techniques for portfolio insurance strategies. It simply consists of reallocating the risky part of a portfolio with respect to market conditions, via a leverage parameter - called the multiple - guaranteeing a predetermined floor. We propose to introduce a conditional time-varying multiple as an alternative to the standard unconditional CPPI method, directly linked to actual risk management problematics. This "ex ante" approach for the conditional multiple aims to diversify the risk model associated, for example, with the expected shortfall (ES) or extreme risk measure estimations. First, we recall the portfolio insurance principles, and main properties of the CPPI strategy, including the time-invariant portfolio protection (TIPP) strategy, as introduced by Estep and Kritzman (1988). We emphasize the existence of an upper bound on the multiple, for example to hedge against sudden drops in the market. Then, we provide the main properties of the conditional multiples for well-known financial models including the discrete-time portfolio rebalancing case and Lévy processes to describe the risky asset dynamics. For this purpose, we precisely define and evaluate different gap risks, in both conditional and unconditional frameworks. As a by-product, the introduction of discrete or random time portfolio rebalancing allows us to determine and/or estimate the density of durations between rebalancements. Finally, from a more practical and statistical point of view due to trading restrictions, we present the class of Dynamic AutoRegressive Expectile (DARE) models for estimating the conditional multiple. This latter approach provides useful complementary information about the risk and performance associated with probabilistic approaches to the conditional multiple.

Suggested Citation

  • Benjamin Hamidi & Bertrand Maillet & Jean-Luc Prigent, 2014. "A Dynamic AutoRegressive Expectile for Time-Invariant Portfolio Protection Strategies," Working Papers halshs-01015390, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01015390
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01015390
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    References listed on IDEAS

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    Cited by:

    1. Branger, Nicole & Mahayni, Antje & Zieling, Daniel, 2015. "Robustness of stable volatility strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 134-151.
    2. Caporin, Massimiliano & Costola, Michele & Jannin, Gregory & Maillet, Bertrand, 2018. "“On the (Ab)use of Omega?”," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 11-33.
    3. repec:ipg:wpaper:2014-604 is not listed on IDEAS
    4. repec:ipg:wpaper:2014-511 is not listed on IDEAS
    5. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-016-2121-8 is not listed on IDEAS
    6. repec:ipg:wpaper:2014-509 is not listed on IDEAS
    7. Naceur Naguez & Jean-Luc Prigent, 2014. "Dynamic Portfolio Insurance Strategies: Risk Management under Johnson Distributions," Working Papers 2014-329, Department of Research, Ipag Business School.
    8. repec:ipg:wpaper:2014-468 is not listed on IDEAS
    9. repec:eee:finlet:v:24:y:2018:i:c:p:10-18 is not listed on IDEAS
    10. repec:ipg:wpaper:2014-531 is not listed on IDEAS
    11. repec:eee:ejores:v:269:y:2018:i:1:p:363-381 is not listed on IDEAS
    12. Farooq, Muhammad & Steinwart, Ingo, 2017. "An SVM-like approach for expectile regression," Computational Statistics & Data Analysis, Elsevier, vol. 109(C), pages 159-181.
    13. Xiu Xu & Andrija Mihoci & Wolfgang Karl Härdle, "undated". "lCARE – localizing Conditional AutoRegressive Expectiles," SFB 649 Discussion Papers SFB649DP2015-052, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    14. Zieling, Daniel & Mahayni, Antje & Balder, Sven, 2014. "Performance evaluation of optimized portfolio insurance strategies," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 212-225.
    15. repec:ipg:wpaper:2014-510 is not listed on IDEAS

    More about this item

    Keywords

    Assurance de prtefeuille; VaR conditionnelle; Valeur Extrême; CPPI; VaR; Expected Shorfall; Expectile; Quantile Regression; Dynamic Quantile Model; Extreme Value;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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