Performance Evaluation of Portfolio Insurance Strategies Using Stochastic Dominance Criteria

29 Pages Posted: 4 May 2007  

Jan Annaert

University of Antwerp Department of Accounting & Finance; Antwerp Management School

Sofie Van Osselaer

Ghent University, Department of Financial Economics

Bert Verstraete

KBC Asset Management

Date Written: April 2007

Abstract

The continuing creation of portfolio insurance applications as well as the mixed research evidence suggests that so far no consensus has been reached about the effectiveness of portfolio insurance. Therefore, this paper provides a performance evaluation of the stop-loss, synthetic put and constant proportion portfolio insurance techniques based on a block-bootstrap simulation. Apart from more traditional performance measures, we consider the Value-at-risk and Expected Shortfall of the strategies, which are more appropriate in an insurance context. An additional performance evaluation is given by means of the stochastic dominance framework where we account for sampling error. A sensitivity analysis is performed in order to examine the impact on performance of a change in a specific decision variable (ceteris paribus). The results indicate that a buy-and-hold strategy does not dominate the portfolio insurance strategies at any stochastic dominance order. Moreover, both for the stop-loss and synthetic put strategy a 100% floor value outperforms lower floor values. For the CPPI strategy we find that a higher CPPI multiple enhances the upward potential of the CPPI strategies, but harms the protection level in return. As regards the optimal rebalancing frequency, daily rebalancing should be preferred for the synthetic put and CPPI strategy, despite the higher transaction costs.

Keywords: Portfolio insurance, Performance evaluation, Stochastic dominance, Block-bootstrap simulation

JEL Classification: C15, G11

Suggested Citation

Annaert, Jan and Van Osselaer, Sofie and Verstraete, Bert, Performance Evaluation of Portfolio Insurance Strategies Using Stochastic Dominance Criteria (April 2007). Available at SSRN: https://ssrn.com/abstract=979882 or http://dx.doi.org/10.2139/ssrn.979882

Jan Annaert (Contact Author)

University of Antwerp Department of Accounting & Finance ( email )

Faculty of Applied Economics
Prinsstraat 13
Antwerp, B-2000
Belgium

HOME PAGE: http://https://www.uantwerp.be/en/staff/jan-annaert/

Antwerp Management School ( email )

Het Brantijser
Sint-Jacobsmarkt 9-13
Antwerp, 2000
Belgium

Sofie Van Osselaer

Ghent University, Department of Financial Economics ( email )

W.Wilsonplein 5D
Gent, 9000
Belgium

Bert Verstraete

KBC Asset Management ( email )

Havenlaan 2
Brussels, 1080
Belgium

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