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http://ssrn.com/abstract=1289265
 
 

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A Risk Management Approach for Portfolio Insurance Strategies


Benjamin Hamidi


Université Paris I Panthéon-Sorbonne - CES/CNRS

Bertrand B. Maillet


University of Orléans; LEO/CNRS

Jean-Luc Prigent


University of Cergy-Pontoise - ThEMA

December 1, 2008

Proceedings of the 1st EIF International Financial Research Forum, Economica, 2009

Abstract:     
Controlling and managing potential losses is one of the main objective of the Risk Management. Following Ben Ameur and Prigent (2007) and Chen et al. (2008), and extending the first results by Hamidi et al. (2009) when adopting a risk management approach for defining insurance portfolio strategies, we analyze and illustrate a specific dynamic portfolio insurance strategy depending on the Value-at-Risk level of the covered portfolio on the French stock market. This dynamic approach is derived from the traditional and popular portfolio insurance strategy (Cf. Black and Jones, 1987; Black and Perold, 1992): the so-called "Constant Proportion Portfolio Insurance" (CPPI). However, financial results produced by this strategy crucially depend upon the leverage - called the multiple- likely guaranteeing a predetermined floor value whatever the plausible market evolutions. In other words, the unconditional multiple is defined once and for all in the traditional setting.

The aim of this article is to further examine an alternative to the standard CPPI method, based on the determination of a conditional multiple. In this time-varying framework, the multiple is conditionally determined in order for the risk exposure to remain constant, even if it also depends upon market conditions. Furthermore, we propose to define the multiple as a function of an extended Dynamic AutoRegressive Quantile model of the Value-at-Risk (DARQ-VaR). Using a French daily stock database (CAC40 and individual stocks in the period 1998-2008), we present the main performance and risk results of the proposed Dynamic Proportion Portfolio Insurance strategy, first on real market data and secondly on artificial bootstrapped and surrogate data. Our main conclusion strengthens the previous ones: the conditional Dynamic Strategy with Constant-risk exposure dominates most of the time the traditional Constant-asset exposure unconditional strategies.

Number of Pages in PDF File: 15

Keywords: CPPI, Portfolio Insurance, VaR, CAViaR, Quantile Regression, Dynamic Quantile Model, Expected Shortfall, Extreme Value

JEL Classification: G11, C13, C14, C22, C32

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Date posted: October 27, 2008 ; Last revised: June 10, 2009

Suggested Citation

Hamidi, Benjamin and Maillet, Bertrand B. and Prigent , Jean-Luc, A Risk Management Approach for Portfolio Insurance Strategies (December 1, 2008). Proceedings of the 1st EIF International Financial Research Forum, Economica, 2009. Available at SSRN: http://ssrn.com/abstract=1289265 or http://dx.doi.org/10.2139/ssrn.1289265

Contact Information

Benjamin Hamidi
University of Paris 1 Pantheon-Sorbonne - CES/CNRS ( email )
106 bv de l'Hôpital
Paris, 75013
France
Bertrand B. Maillet (Contact Author)
University of Orléans ( email )
Rue de Blois
Orléans, F-45 067
France
HOME PAGE: http://www.bertrand-maillet.net
LEO/CNRS ( email )
Rue de Blois
Orléans, F-45 067
France
HOME PAGE: http://www.bertrand-maillet.net
Jean-Luc Prigent
University of Cergy-Pontoise - ThEMA ( email )
33 boulevard du port
33 bd du Port
F-95011 Cergy CEDEX
France
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