Time Invariant Portfolio Protection: Statistical Properties and Strategy Implications

17 Pages Posted: 13 Nov 2023

See all articles by Gianluca Baglini

Gianluca Baglini

University of Geneva - Geneva School of Economics and Management

Date Written: October 14, 2023

Abstract

Portfolio insurance is a risk management strategy that aims to protect investors from significant losses in their portfolios. One of the most widely used portfolio insurance techniques is constant protection portfolio insurance (CPPI), which uses dynamic rebalancing to preserve a set minimum level of portfolio value at maturity. Another popular portfolio insurance technique is the time-invariant portfolio protection (TIPP), which implements a time-varying floor that enables investors to maintain not only a fraction of the initial investment but also part of the gains accrued over time. In this research paper, we will extend the analysis done by Khuman et al. [2008] on CPPI, and focus on the underlying principles, implementation, and performance of the TIPP technique. We will also explore the advantages and disadvantages of each technique and the factors that influence its effectiveness. The objective of this research is to provide a comprehensive understanding of the mechanics of TIPP, and to compare the statistical properties of returns with those obtained from CPPI. Moreover, the papers compares the strategy’s performance and risk metrics obtained by testing the strategy on two different underlying processes, Geometric Browian Motion (GBM) and Jump Diffusion Process (JDP), and check the extent to which the introduction of returns negative skewness harms the effectiveness of the methodology.

Keywords: Portfolio Insurance, CPPI, TIPP, Capital Protection

Suggested Citation

Baglini, Gianluca, Time Invariant Portfolio Protection: Statistical Properties and Strategy Implications (October 14, 2023). Available at SSRN: https://ssrn.com/abstract=4602283 or http://dx.doi.org/10.2139/ssrn.4602283

Gianluca Baglini (Contact Author)

University of Geneva - Geneva School of Economics and Management ( email )

Uni Mail
Bd du Pont-d'Arve 40
Geneva, 1211
Switzerland

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