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 language | English |
|---|---|
| Pages (from-to) | 75-103 |
| Number of pages | 29 |
| Journal | Annals of Operations Research |
| Volume | 185 |
| Issue number | 1 |
| DOIs | |
| State | Published - May 2011 |
Keywords
- CPPI
- OBPI
- Portfolio insurance
- Risk-averse investor
- Stochastic dominance
- Volatility spread