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A Risk Management Approach for Portfolio Insurance Strategies

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

15 Pages Posted: 27 Oct 2008 Last revised: 10 Jun 2009

Benjamin Hamidi

Université Paris I Panthéon-Sorbonne - CES/CNRS

Bertrand B. Maillet

EMLyon Business School (Paris Campus)

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA

Date Written: December 1, 2008

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.

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

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

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: https://ssrn.com/abstract=1289265 or http://dx.doi.org/10.2139/ssrn.1289265

Benjamin Hamidi

Université Paris I Panthéon-Sorbonne - CES/CNRS ( email )

106 bv de l'Hôpital
Paris, 75013
France

Bertrand B. Maillet (Contact Author)

EMLyon Business School (Paris Campus) ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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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