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Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

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  • Agić-Šabeta Elma

    (Bosna Bank International, Bosnia and Herzegovina)

Abstract

Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity.Objectives: The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio.Methods/Approach: Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns.Results: According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy.Conclusions: Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.

Suggested Citation

  • Agić-Šabeta Elma, 2016. "Constant Proportion Portfolio Insurance Strategy in Southeast European Markets," Business Systems Research, Sciendo, vol. 7(1), pages 59-80, March.
    • Handle: RePEc:bit:bsrysr:v:7:y:2016:i:1:p:59-80
    DOI: 10.1515/bsrj-2016-0005
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    References listed on IDEAS

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    More about this item

    Keywords

    investments; portfolio insurance; constant proportion portfolio insurance; Monte Carlo simulations; interest rate models;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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