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Model-free CPPI

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  • Alexander Schied

Abstract

We consider Constant Proportion Portfolio Insurance (CPPI) and its dynamic extension, which may be called Dynamic Proportion Portfolio Insurance (DPPI). It is shown that these investment strategies work within the setting of F\"ollmer's pathwise It\^o calculus, which makes no probabilistic assumptions whatsoever. This shows, on the one hand, that CPPI and DPPI are completely independent of any choice of a particular model for the dynamics of asset prices. They even make sense beyond the class of semimartingale sample paths and can be successfully defined for models admitting arbitrage, including some models based on fractional Brownian motion. On the other hand, the result can be seen as a case study for the general issue of robustness in the face of model uncertainty in finance.

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  • Alexander Schied, 2013. "Model-free CPPI," Papers 1305.5915, arXiv.org, revised Jan 2014.
    • Handle: RePEc:arx:papers:1305.5915
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    References listed on IDEAS

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    Cited by:

    1. Alexander Schied, 2015. "On a class of generalized Takagi functions with linear pathwise quadratic variation," Papers 1501.00837, arXiv.org, revised Aug 2015.

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