Risk Management of CPPI Funds in Switching Regime Markets

Abstract

The constant proportion portfolio insurance is a dynamic strategy of investment protecting a fund against a fall of its market value below a predetermined floor. In this work, we revisit the CPPI under the assumption that the risky asset is a stochastic process whose the average return and volatility jump from one set of values to another one. After having reviewed the calibration procedure, we first propose analytical formulas to infer the first four centered moments, of a CPPI fund. Next, we show how the Value At Risk and the Tail VaR can be retrieved by inversion of the Fourier transform of the characteristic function of the return density. We end this article by an application to a CPPI fund tracking the CAC 40 index and show the importance on the multiplier on the average yield.

Keywords: CPPI, switching regime, portfolio optimization.

JEL Classification: G11 , C6