Stochastic dominance of portfolio insurance strategies: OBPI versus CPPI

Rudi Zagst, Julia Kraus

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

The purpose of this article is to analyze and compare two standard portfolio insurance methods: Option-based Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance (CPPI). Various stochastic dominance criteria up to third order are considered. We derive parameter conditions implying the second- and third-order stochastic dominance of the CPPI strategy. In particular, restrictions on the CPPI multiplier resulting from the spread between the implied volatility and the empirical volatility are analyzed.

Original languageEnglish
Pages (from-to)75-103
Number of pages29
JournalAnnals of Operations Research
Volume185
Issue number1
DOIs
StatePublished - May 2011

Keywords

  • CPPI
  • OBPI
  • Portfolio insurance
  • Risk-averse investor
  • Stochastic dominance
  • Volatility spread

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