A Bootstrap-Based Comparison of Portfolio Insurance Strategies

53 Pages Posted: 6 Oct 2013 Last revised: 14 Jun 2014

See all articles by Hubert Dichtl

Hubert Dichtl

dichtl research & consulting GmbH

Wolfgang Drobetz

Hamburg University

Martin Wambach

University of Hamburg

Date Written: June 12, 2014

Abstract

This study presents a systematic comparison of portfolio insurance strategies. In order to test for statistical significance of the differences in downside performance risk measures between pairs of portfolio insurance strategies, we use a bootstrap-based hypothesis test. Our comparison of different strategies considers the following distinguishing characteristics: static versus dynamic; initial wealth versus cumulated wealth protection; model-based versus model-free; and strong floor compliance versus probabilistic floor compliance. Our results show that the classical portfolio insurance strategies synthetic put and CPPI provide superior downside protection compared to a simple stop-loss trading rule, also resulting in significantly higher Omega ratios. Analyzing more recently developed strategies, neither the TIPP strategy (as an ‘improved’ CPPI strategy) nor the dynamic VaR-strategy provide significant improvements over the more traditional portfolio insurance strategies. The attractiveness of the dynamic VaR-strategy strongly depends on the quality of the estimates for the required input parameters, in particular, the equity risk premium. However, if an investor possesses superior forecasting skills, other active (market timing) strategies may exist which generate higher (risk-adjusted) returns compared to a protected passive stock market investment.

Keywords: Portfolio insurance strategies, Omega ratio, bootstrap simulation, Monte Carlo simulation

JEL Classification: G11, G13

Suggested Citation

Dichtl, Hubert and Drobetz, Wolfgang and Wambach, Martin, A Bootstrap-Based Comparison of Portfolio Insurance Strategies (June 12, 2014). Available at SSRN: https://ssrn.com/abstract=2336191 or http://dx.doi.org/10.2139/ssrn.2336191

Hubert Dichtl

dichtl research & consulting GmbH ( email )

Am Bahnhof 7
65812 Bad Soden am Taunus
Germany

HOME PAGE: http://www.dichtl-rc.de

Wolfgang Drobetz (Contact Author)

Hamburg University ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Martin Wambach

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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