Performance evaluation of portfolio insurance strategies using stochastic dominance criteria
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.
|Date of creation:||Jun 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Hoveniersberg 4, B-9000 Gent|
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
Web page: http://www.ugent.be/eb
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Davidson, R. & Duclos, J.-Y., 1998.
"Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality,"
98a14, Universite Aix-Marseille III.
- Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
- Davidson, Russell & Duclos, Jean-Yves, 1998. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Cahiers de recherche 9805, Université Laval - Département d'économique.
- Linton, Oliver & Maasoumi, Esfandiar & Whang, Yoon-Jae, 2003.
"Consistent Testing for Stochastic Dominance under General Sampling Schemes,"
SFB 373 Discussion Papers
2003,31, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Oliver Linton & Esfandiar Maasoumi & Yoon-Jae Whang, 2003. "Consistent testing for stochastic dominance under general sampling schemes," LSE Research Online Documents on Economics 2208, London School of Economics and Political Science, LSE Library.
- Whitmore, G A, 1970. "Third-Degree Stochastic Dominance," American Economic Review, American Economic Association, vol. 60(3), pages 457-59, June.
- Kroll, Yoram & Levy, Haim, 1980. "Sampling Errors and Portfolio Efficient Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 655-688, September.
- Cesari, Riccardo & Cremonini, David, 2003. "Benchmarking, portfolio insurance and technical analysis: a Monte Carlo comparison of dynamic strategies of asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 987-1011, April.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
- Benninga, Simon & Blume, Marshall E, 1985. " On the Optimality of Portfolio Insurance," Journal of Finance, American Finance Association, vol. 40(5), pages 1341-52, December.
- Acerbi, Carlo & Tasche, Dirk, 2002.
"On the coherence of expected shortfall,"
Journal of Banking & Finance,
Elsevier, vol. 26(7), pages 1487-1503, July.
- Simon Benninga & Marshall Blume, . "On the Optimality of Portfolio Insurance," Rodney L. White Center for Financial Research Working Papers 05-85, Wharton School Rodney L. White Center for Financial Research.
- Ray D. Nelson & Rulon D. Pope, 1991. "Bootstrapped Insights into Empirical Applications of Stochastic Dominance," Management Science, INFORMS, vol. 37(9), pages 1182-1194, September.
- Booth, James R. & Tehranian, Hassan & Trennepohl, Gary L., 1985. "Efficiency Analysis and Option Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 435-450, December.
- Bird, Ron & Cunningham, Ross & Dennis, David & Tippett, Mark, 1990. "Portfolio insurance: a simulation under different market conditions," Insurance: Mathematics and Economics, Elsevier, vol. 9(1), pages 1-19, March.
- Black, Fischer & Perold, AndreF., 1992. "Theory of constant proportion portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 403-426.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Leland, Hayne E, 1980.
" Who Should Buy Portfolio Insurance?,"
Journal of Finance,
American Finance Association, vol. 35(2), pages 581-94, May.
- Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
- Hayne E. Leland., 1984.
"Option Pricing and Replication with Transactions Costs,"
Research Program in Finance Working Papers
144, University of California at Berkeley.
- Leland, Hayne E, 1985. " Option Pricing and Replication with Transactions Costs," Journal of Finance, American Finance Association, vol. 40(5), pages 1283-1301, December.
- Stein, William & Pfaffenberger, Roger & Kumar, P. C., 1983. "On the Estimation Risk in First-Order Stochastic Dominance: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 471-476, December.
- Gilles Sanfilippo, 2003. "Stocks, bonds and the investment horizon: a test of time diversification on the French market," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 345-351.
- Gary L. Trennepohl & James R. Booth & Hassan Tehranian, 1988. "An Empirical Analysis Of Insured Portfolio Strategies Using Listed Options," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(1), pages 1-12, 03.
- Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
- Simon Benninga & Marshall Blume, . "On the Optimality of Portfolio Insurance," Rodney L. White Center for Financial Research Working Papers 5-85, Wharton School Rodney L. White Center for Financial Research.
- Brennan, Michael J & Schwartz, Eduardo S, 1988. " Time-Invariant Portfolio Insurance Strategies," Journal of Finance, American Finance Association, vol. 43(2), pages 283-99, June.
- Thierry Post, 2003. "Empirical Tests for Stochastic Dominance Efficiency," Journal of Finance, American Finance Association, vol. 58(5), pages 1905-1932, October.
When requesting a correction, please mention this item's handle: RePEc:rug:rugwps:07/473. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nathalie Verhaeghe)
If references are entirely missing, you can add them using this form.