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Average Portfolio Insurance Strategies

Author

Listed:
  • Jacques Pézier

    (ICMA Centre, Henley Business School, University of Reading)

  • Johanna Scheller

    (ICMA Centre, Henley Business School, University of Reading)

Abstract

We design average portfolio insurance (API) strategies with an investment floor and a buffer that is a power of a geometric average of the underlying asset price. We prove that API strategies are optimal for investors with hyperbolic absolute risk aversion who become progressively more risk averse over time. During the averaging period, API strategies reduce the proportion of wealth allocated to the risky asset, which is the traditional life cycle investment recommendation. We compare the sensitivities of the fair price of equivalent payoffs generated by average and constant proportion portfolio insurance strategies and illustrate the performance of API strategies.

Suggested Citation

  • Jacques Pézier & Johanna Scheller, 2012. "Average Portfolio Insurance Strategies," ICMA Centre Discussion Papers in Finance icma-dp2012-05, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2012-05
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    File URL: http://www.icmacentre.ac.uk/files/discussion-papers/DP_2012_05.pdf
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    References listed on IDEAS

    as
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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; constant proportion portfolio insurance; average price Asian options; optimal payoff profile; utility theory; life cycle portfolio choice; power options.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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