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Risk management of margin based portfolio strategies for dynamic portfolio insurance with minimum market exposure

Author

Listed:
  • Killian Pluzanski
  • Jean-Luc Prigent

    (Université de Cergy-Pontoise, THEMA)

Abstract

We extend the standard Constant Proportion Portfolio Insurance (CPPI) by introducing simultaneously margin based dynamic strategies and constraints on minimum market expo- sure. This leads us to introduce specific conditional floors, allowing the portfolio of not being monetized (to avoid the cash-lock risk) while ensuring better participation in potential market increases. To control the risk of such strategies, we introduce risk measures based both on quantile conditions. Our empirical analysis is mainly conducted on S&P 500 and Euro Stoxx 50, by using Monte-Carlo experiments based on circular block boostrap method. This allows us to analyze the impact of the different parameters that define our CPPI strategies (i.e. CPPI multiple, successive margins, level of the minimum market exposure). We estimate and compare the cumulative distribution functions of the portfolio returns corresponding to the various insur- ance strategies that we investigate. We provide also their first four moments and measure their respective performances using both the Sharpe and the Omega ratios. Our results highlight the benefits of introducing time-varying floors associated to a decreasing sequence of margins while keeping the market exposure above a minimum level.

Suggested Citation

  • Killian Pluzanski & Jean-Luc Prigent, 2023. "Risk management of margin based portfolio strategies for dynamic portfolio insurance with minimum market exposure," THEMA Working Papers 2023-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2023-22
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    References listed on IDEAS

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    1. Alexei Chekhlov & Stanislav Uryasev & Michael Zabarankin, 2005. "Drawdown Measure In Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 13-58.
    2. Ben Ameur, H. & Prigent, J.L., 2014. "Portfolio insurance: Gap risk under conditional multiples," European Journal of Operational Research, Elsevier, vol. 236(1), pages 238-253.
    3. Rama Cont & Peter Tankov, 2009. "Constant Proportion Portfolio Insurance In The Presence Of Jumps In Asset Prices," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 379-401, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Portfolio insurance; CPPI strategy; time vaying floor; margin based strategy; market exposure;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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