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How Good Are Portfolio Insurance Strategies?

In: Alternative Investments And Strategies

Author

Listed:
  • SVEN BALDER

    (Mercator School of Management, University of Duisburg-Essen, Lotharstr. 65, 47057 Duisburg, Germany)

  • ANTJE MAHAYNI

    (Mercator School of Management, University of Duisburg-Essen, Lotharstr. 65, 47057 Duisburg, Germany)

Abstract

Portfolio insurance strategies are designed to achieve a minimum level of wealth while at the same time participating in upward moving markets. The most prominent examples of dynamic versions are option-based strategies with synthetic put and constant proportion portfolio insurance strategies. It is well known that, in a Black/Scholes type model setup, these strategies can be achieved as optimal solution by forcing an exogenously given guarantee into the expected utility maximization problem of an investor with CRRA utility function. The CPPI approach is attained by the introduction of a subsistence level, the OBPI approach stems from an additional constraint on the terminal portfolio value. We bring these results together in order to explain when and why OBPI strategies are better than CPPI strategies and vice versa. We determine the utility losses, which are caused by introducing a terminal guarantee into the unconstrained maximization approach. In addition, we focus on utility losses, which are due to market frictions such as discrete-time trading, transaction costs, and borrowing constraints.

Suggested Citation

  • Sven Balder & Antje Mahayni, 2010. "How Good Are Portfolio Insurance Strategies?," World Scientific Book Chapters, in: Rüdiger Kiesel & Matthias Scherer & Rudi Zagst (ed.), Alternative Investments And Strategies, chapter 10, pages 227-257, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814280112_0010
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    Cited by:

    1. Raquel M. Gaspar, 2016. "On Path–dependency of Constant Proportion Portfolio Insurance strategies," EcoMod2016 9381, EcoMod.
    2. An Chen & Thai Nguyen & Manuel Rach, 2021. "A collective investment problem in a stochastic volatility environment: The impact of sharing rules," Annals of Operations Research, Springer, vol. 302(1), pages 85-109, July.
    3. Weng, Chengguo, 2013. "Constant proportion portfolio insurance under a regime switching exponential Lévy process," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 508-521.
    4. Sami Attaoui & Vincent Lacoste, 2013. "A scenario-based description of optimal American capital guaranteed strategies," Finance, Presses universitaires de Grenoble, vol. 34(2), pages 65-119.
    5. Chen, An & Hentschel, Felix & Klein, Jakob K., 2015. "A utility- and CPT-based comparison of life insurance contracts with guarantees," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 327-339.

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