Constant or Variable? A Performance Analysis among Portfolio Insurance Strategies
Abstract
:1. Introduction
2. Portfolio Insurance Strategies: Definitions and Features
2.1. Constant Proportion Portfolio Insurance Strategy
- The choice of a floor, which represents the minimum value of the portfolio which is acceptable for an investor at any instant of time during the management period Its initial value, capitalized at the non-risky rate, must be equal to a predetermined percentage of the initial capital deposit;
- The choice of a dynamic investment rule on the risky asset defined as follows: the total amount (the exposure) invested into the underlying asset is equal to a fixed proportion m (the multiplier) of the difference between the portfolio value and the floor . Such a difference is called the cushion and is denoted by . Since the strategy results to be self-financing, the remaining amount, , is invested into the riskless asset , such as a money market account or a government bond, with log-return for each period
2.2. Time Invariant Portfolio Protection Strategy
2.3. Exponential Proportion Portfolio Insurance Strategy
2.4. Practical Issues for the Implementation of Portfolio Insurance Strategies
3. Simulation Setup
3.1. Data and Design of Empirical Analysis
- We randomly draw a market index (S&P500, Hang Seng, Nikkei 225 or FTSE 100) with replacement;
- We draw with replacement a starting date;
- Starting from the initial date obtained in Step 2, we analyze the one-year performance of CPPI, TIPP, and EPPI strategies for the drawn market, i.e., the 252 days following the starting date are used to evaluate the different portfolio insurance strategies;
- The procedure (Step 1–Step 3) is repeated 20,000 times.
3.2. Performance Measures and Statistical Tests
4. Performance Measurement Results
4.1. Constant Proportion Portfolio Insurance vs. Its Generalizations
4.2. Changing the Protection Level
4.3. Changing the Rebalancing Frequency
5. Concluding Remarks
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
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Reference | Dynamic PI Strategies | Static PI | Methodology | ||
---|---|---|---|---|---|
CPPI | TIPP | EPPI | Strategies | (Model-Free) | |
Cesari and Cremonini (2003) | ✔ | ✔ | |||
Lee et al. (2008) | ✔ | ✔ | |||
Annaert et al. (2009) | ✔ | ✔ | ✔ | ||
Dichtl and Drobetz (2011) | ✔ | ✔ | ✔ | ||
Hamidi et al. (2014) | ✔ | ||||
Zieling et al. (2014) | ✔ | ||||
Ardia et al. (2016) | ✔ | ✔ | ✔ | ||
Dichtl et al. (2017) | ✔ | ✔ | ✔ | ||
Chen et al. (2022) | ✔ | ✔ | |||
Our work | ✔ | ✔ | ✔ | ✔ |
Series | Average Return (%) | Standard Deviation () (%) | Skewness | Kurtosis | p-Value Autocorrelation (Ljung-Box Test) | p-Value Heteroscedasticity (Engle’s ARCH Test) |
---|---|---|---|---|---|---|
UKX | ||||||
HSI | ||||||
NKY | ||||||
SPX |
Portfolio Insurance Strategy | CPPI | TIPP | EPPI | EPPI | EPPI |
---|---|---|---|---|---|
(a = 5) | (a = 10) | (a = 20) | |||
Rebalancing discipline | Daily | Daily | Daily | Daily | Daily |
Protection level (%) | |||||
Multiplier | 14 | 14 | - | - | - |
- | - | 14 | 14 | 14 | |
Initial equity allocation (%) | |||||
Average excess return | *** | ||||
Standard deviation | *** | *** | *** | ||
Sharpe ratio | *** | ||||
% | *** | ** | *** | *** | |
Average negative excess return | *** | *** | |||
VaR 5% | *** | * | *** | *** | |
ES 5% | *** | *** | *** | *** | |
Skewness | |||||
Omega measure |
Volatility Subgroup Rebalancing Discipline | Low Volatility Regime Daily | Medium Volatility Regime Daily | High Volatility Regime Daily | ||||||
---|---|---|---|---|---|---|---|---|---|
Portfolio insurance strategy | CPPI | TIPP | EPPI | CPPI | TIPP | EPPI | CPPI | TIPP | EPPI |
Protection level (%) | |||||||||
Multiplier | 14 | 14 | - | 14 | 14 | - | 14 | 14 | - |
- | - | 14 | - | - | 14 | - | - | 14 | |
a | - | - | 20 | - | - | 20 | - | - | 20 |
Initial equity allocation (%) | |||||||||
Average excess return | *** | *** | *** | ||||||
Standard deviation | *** | *** | *** | *** | *** | *** | |||
Sharpe ratio | *** | *** | *** | *** | |||||
% | *** | *** | *** | *** | *** | ||||
Average negative excess return | *** | *** | *** | *** | *** | *** | |||
VaR 5% | *** | *** | *** | *** | *** | *** | |||
ES 5% | *** | *** | *** | *** | *** | *** | |||
Skewness | |||||||||
Omega measure |
Portfolio Insurance Strategy | CPPI | TIPP | EPPI | ||||||
---|---|---|---|---|---|---|---|---|---|
Rebalancing discipline | Daily | Daily | Daily | ||||||
Protection level (%) | 90 | 95 | 90 | 95 | 90 | 95 | |||
Multiplier | 14 | 14 | - | 14 | 14 | - | 14 | 14 | - |
- | - | 14 | - | - | 14 | - | - | 14 | |
a | - | - | 20 | - | - | 20 | - | - | 20 |
Initial equity allocation (%) | |||||||||
Average excess return | *** | *** | *** | *** | *** | *** | |||
Standard deviation | *** | *** | *** | *** | *** | *** | |||
Sharpe ratio | *** | *** | *** | *** | *** | *** | |||
% | *** | *** | *** | *** | *** | *** | |||
Average negative excess return | *** | *** | *** | *** | *** | *** | |||
VaR 5% | *** | *** | *** | *** | *** | *** | |||
ES 5% | *** | *** | *** | *** | *** | *** | |||
Skewness | *** | *** | |||||||
Omega measure |
Portfolio Insurance Strategy | CPPI | TIPP | EPPI | ||||||
---|---|---|---|---|---|---|---|---|---|
Rebalancing discipline | Daily | Weekly | Monthly | Daily | Weekly | Monthly | Daily | Weekly | Monthly |
Protection level (%) | |||||||||
Multiplier | 14 | 14 | - | 14 | 14 | - | 14 | 14 | - |
- | - | 14 | - | - | 14 | - | - | 14 | |
a | - | - | 20 | - | - | 20 | - | - | 20 |
Initial equity allocation (%) | |||||||||
Average excess return | *** | *** | *** | *** | *** | *** | |||
Standard deviation | *** | *** | *** | *** | *** | *** | |||
Sharpe ratio | *** | *** | *** | *** | *** | *** | |||
% | *** | *** | *** | *** | *** | *** | *** | *** | |
Average negative excess return | *** | *** | *** | *** | *** | *** | |||
VaR 5% | *** | *** | *** | *** | *** | *** | |||
ES 5% | *** | *** | *** | *** | *** | *** | |||
Skewness | |||||||||
Omega measure |
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Mancinelli, D.; Oliva, I. Constant or Variable? A Performance Analysis among Portfolio Insurance Strategies. Risks 2023, 11, 105. https://doi.org/10.3390/risks11060105
Mancinelli D, Oliva I. Constant or Variable? A Performance Analysis among Portfolio Insurance Strategies. Risks. 2023; 11(6):105. https://doi.org/10.3390/risks11060105
Chicago/Turabian StyleMancinelli, Daniele, and Immacolata Oliva. 2023. "Constant or Variable? A Performance Analysis among Portfolio Insurance Strategies" Risks 11, no. 6: 105. https://doi.org/10.3390/risks11060105