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The payoff distribution model: an application to dynamic portfolio insurance

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  • Alexandre Hocquard
  • Nicolas Papageorgiou
  • Bruno Remillard

Abstract

We propose an innovative approach for dynamic portfolio insurance that overcomes many of the limitations of the earlier techniques. We transform the Payoff Distribution Model, originally introduced by Dybvig [ J . Business , 1988, 61 (3), 369-393] as a performance measure, into a fund management tool. This approach allows us to generate funds with pre-specified distributional properties. Specifically, we generate funds that are characterized by a Left Truncated Gaussian distribution and then demonstrate out of sample, using different performance and risk measures, that this approach to managing market exposure leads to a better risk control at a lower cost than more popular techniques such as the CPPI.

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  • Alexandre Hocquard & Nicolas Papageorgiou & Bruno Remillard, 2015. "The payoff distribution model: an application to dynamic portfolio insurance," Quantitative Finance, Taylor & Francis Journals, vol. 15(2), pages 299-312, February.
    • Handle: RePEc:taf:quantf:v:15:y:2015:i:2:p:299-312
    DOI: 10.1080/14697688.2012.661872
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    References listed on IDEAS

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    1. Martin Schweizer, 1995. "Variance-Optimal Hedging in Discrete Time," Mathematics of Operations Research, INFORMS, vol. 20(1), pages 1-32, February.
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    7. Brennan, Michael J & Schwartz, Eduardo S, 1979. "Alternative Investment Strategies for the Issuers of Equity Linked Life Insurance Policies with an Asset Value Guarantee," The Journal of Business, University of Chicago Press, vol. 52(1), pages 63-93, January.
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    Cited by:

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    4. Raquel M. Gaspar, 2016. "On Path–dependency of Constant Proportion Portfolio Insurance strategies," EcoMod2016 9381, EcoMod.
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    6. Austin Shelton, 2017. "The value of stop-loss, stop-gain strategies in dynamic asset allocation," Journal of Asset Management, Palgrave Macmillan, vol. 18(2), pages 124-143, March.
    7. Bernard, Carole & Kwak, Minsuk, 2016. "Semi-static hedging of variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 173-186.

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