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The Payoff Distribution Model: An Application to Dynamic Portfolio InsuranceAlexandre HocquardPavilion Advisory Group; HEC Montreal - Department of Finance Nicolas A. PapageorgiouHEC Montreal - Department of Finance Bruno RemillardHEC Montreal July 26, 2009 Abstract: We propose an innovative approach for dynamic portfolio insurance that overcomes many of the limitations of the earlier techniques. We transform the Payoff Distribution Model, originally introduced by Dybvig (1988) as a performance measure, to a fund management tool. This approach allows us to generate funds with pre-specified distributional properties. Specifically, we generate funds that are characterized by a Left Truncated Gaussian distribution and then demonstrate out of sample, using different performance and risk measures, that this approach to managing market exposure leads to a better risk control at a lower cost than more popular techniques such as the CPPI.
Number of Pages in PDF File: 38 Keywords: Portfolio Insurance, Dynamic Hedging, Constant Volatility, CPPI working papers seriesDate posted: December 23, 2010Suggested CitationContact Information
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