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Performance evaluation of portfolio insurance strategies using stochastic dominance criteria

Author

Listed:
  • J. ANNAERT

    ()

  • S. VAN OSSELAER

    ()

  • B. VERSTRAETE

Abstract

The continuing creation of portfolio insurance applications as well as the mixed research evidence suggests that so far no consensus has been reached about the effectiveness of portfolio insurance. Therefore, this paper provides a performance evaluation of the stop-loss, synthetic put and constant proportion portfolio insurance techniques based on a block-bootstrap simulation. Apart from more traditional performance measures, we consider the Value-at-risk and Expected Shortfall of the strategies, which are more appropriate in an insurance context. An additional performance evaluation is given by means of the stochastic dominance framework where we account for sampling error. A sensitivity analysis is performed in order to examine the impact on performance of a change in a specific decision variable (ceteris paribus). The results indicate that a buy-and-hold strategy does not dominate the portfolio insurance strategies at any stochastic dominance order. Moreover, both for the stop-loss and synthetic put strategy a 100% floor value outperforms lower floor values. For the CPPI strategy we find that a higher CPPI multiple enhances the upward potential of the CPPI strategies, but harms the protection level in return. As regards the optimal rebalancing frequency, daily rebalancing should be preferred for the synthetic put and CPPI strategy, despite the higher transaction costs.

Suggested Citation

  • J. Annaert & S. Van Osselaer & B. Verstraete, 2007. "Performance evaluation of portfolio insurance strategies using stochastic dominance criteria," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/473, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:07/473
    as

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    File URL: http://wps-feb.ugent.be/Papers/wp_07_473.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Portfolio insurance; Performance evaluation; Stochastic dominance; Block-bootstrap simulation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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