MULTIPLIER OPTIMIZATION FOR CONSTANT PROPORTION PORTFOLIO INSURANCE (CPPI) STRATEGY

2020 ◽  
Vol 23 (02) ◽  
pp. 2050011
Author(s):  
OLGA BIEDOVA ◽  
VICTORIA STEBLOVSKAYA
Keyword(s):  
Numerical Optimization ◽  
Performance Measure ◽  
Portfolio Insurance ◽  
Admissible Range ◽  
Constant Proportion ◽  
Black Scholes ◽  
Gap Risk ◽  
Constant Proportion Portfolio Insurance ◽  
Omega Ratio ◽  
Optimal Multiplier

Constant proportion portfolio insurance (CPPI) strategy is a very popular investment solution which provides an investor with a capital protection as well as allows for an equity market participation. In this paper, we propose a two-step approach to the numerical optimization of the CPPI main parameter, multiplier. First, we identify an admissible range of the multiplier values by controlling the shortfall probability (chosen as a measure of the gap risk). Second, within the admissible range, we choose the optimal multiplier value with respect to the omega ratio (chosen as a performance measure). We illustrate the performance of our optimization algorithm on simulated CPPI paths in the Black–Scholes environment with discrete trading as well as on the historical S&P500 data using the block-bootstrap simulations.

scholarly journals Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

2016 ◽  
Vol 7 (1) ◽  
pp. 59-80
Author(s):  
Elma Agić-Šabeta
Keyword(s):  
Investment Strategies ◽  
Government Bond ◽  
Portfolio Insurance ◽  
Risky Assets ◽  
Constant Proportion ◽  
Bond Returns ◽  
High Volatility ◽  
Government Bond Markets ◽  
Constant Proportion Portfolio Insurance ◽  
The Government

Abstract Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity. Objectives: The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio. Methods/Approach: Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns. Results: According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy. Conclusions: Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.

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