Assets' Dependence Structure Implications for Portfolio Insurance

27 Pages Posted: 26 Sep 2018

See all articles by Daniel Mantilla-Garcia

Daniel Mantilla-Garcia

Universidad de Los Andes - School of Management; EDHEC Risk Institute

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration

German Molina

Idalion Capital US LP

Emilien Audeguil

Independent

Date Written: September 4, 2018

Abstract

Portfolio insurance strategies that control benchmark-underperformance risk require estimating the maximum multiplier of the risk budget, which determines the allocation to the performance-seeking asset (PSA) at each point in time. We explore the implications of taking into account the expected co-movements of the PSA and the benchmark asset for the estimation of the multiplier of these portfolio insurance strategies. We illustrate these implications with a maximum relative-drawdown strategy investing in the equal-weighted S&P 500 index as the PSA and in the cap-weighted S&P 500 index as the benchmark asset. Through Monte Carlo simulations we find that the multiplier almost doubles in size across scenarios, and the long-term returns of the strategy using this approach are superior relative to the strategy with a multiplier that ignores expected co-movements according to stochastic dominance tests.

Keywords: tracking error, extreme risk management, copulas, portfolio insurance

JEL Classification: C58, G00, G17, C11

Suggested Citation

Mantilla-Garcia, Daniel and ter Horst, Enrique and Molina, German and Audeguil, Emilien, Assets' Dependence Structure Implications for Portfolio Insurance (September 4, 2018). Available at SSRN: https://ssrn.com/abstract=3244175 or http://dx.doi.org/10.2139/ssrn.3244175

Daniel Mantilla-Garcia (Contact Author)

Universidad de Los Andes - School of Management ( email )

Bogota, Bogota D.C.
Colombia

EDHEC Risk Institute ( email )

Lille
France

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration ( email )

Bogota
Colombia

German Molina

Idalion Capital US LP ( email )

2711 Centerville Rd Ste 400
Wilmington, DE 19808
United States

Emilien Audeguil

Independent ( email )

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