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The Performance of a Stock Index Futures Based Portfolio Insurance Scheme: Australian Evidence


  • Simon Loria
  • Toan Pham

    (School of Banking and Finance, University of New South Wales)

  • Ah Boon Sim

    (School of Banking and Finance, University of New South Wales)


In a Black Scholes world there exists a dynamic trading strategy that can replicate the payoff of an option. The technique of Portfolio Insurance is an application of this principle. This paper examines the ability of a futures based trading strategy to replicate the returns of a protective put option, thereby creating perfect portfolio insurance. The performance of these insured portfolios is simulated over a period from April 1984 to march 1989. Results indicate that portfolio insurance is effective at eliminating downside risk when the market falls significantly albeit at a level below the guaranteed minimum return. For smaller downward movements the results are not as encouraging. While the dynamic strategy may be able to "meet-the-floor" in cost adjusted terms, in most instances the terminal value of the insured portfolio is actually lower than the value of the market portfolio. Reducing the minimum required rate of return increases the likelihood of portfolio insurance being able to acieve its objective. Increasing the volatility estimate above the historical level - which is a way of incorporating market imperfections like transaction costs and futures mispricing into the model - resulted in better performance when the market fell but exacted a higher opportunity costs when prices were rising. Evidence suggests that market initiated rebalance strategies result in better performance although there is a clear transaction cost - replication error trade-off.

Suggested Citation

  • Simon Loria & Toan Pham & Ah Boon Sim, 1991. "The Performance of a Stock Index Futures Based Portfolio Insurance Scheme: Australian Evidence," Working Paper Series 5, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:5

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    References listed on IDEAS

    1. 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 637-654, May-June.
    2. Cornell, Bradford & French, Kenneth R, 1983. " Taxes and the Pricing of Stock Index Futures," Journal of Finance, American Finance Association, vol. 38(3), pages 675-694, June.
    3. John Bowers & Garry Twite, 1985. "Arbitrage Opportunities in The Australian Share Price Index Futures Contract," Australian Journal of Management, Australian School of Business, vol. 10(2), pages 1-29, December.
    4. 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.
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    Cited by:

    1. Binh Huu Do & Robert W. Faff, 2004. "Do futuresā€based strategies enhance dynamic portfolio insurance?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(6), pages 591-608, June.
    2. Binh Huu Do, 2002. "Relative performance of dynamic portfolio insurance strategies: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(3), pages 279-296.
    3. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2009. "The effectiveness of the VaR-based portfolio insurance strategy: An empirical analysis," International Review of Financial Analysis, Elsevier, vol. 18(4), pages 185-197, September.

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