Stochastic dominance of portfolio insurance strategies |
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| Authors: | Rudi Zagst Julia Kraus |
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| Institution: | (1) Department of Foreign Exchange, Central Bank of the Republic of China (Taiwan), 2, Roosevelt Road, Sec. 1, Taipei, 10066, Taiwan, ROC;(2) Accounting and Finance Subject Group, University of Birmingham, Birmingham, UK |
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| Abstract: | The purpose of this article is to analyze and compare two standard portfolio insurance methods: Option-based Portfolio Insurance
(OBPI) and Constant Proportion Portfolio Insurance (CPPI). Various stochastic dominance criteria up to third order are considered.
We derive parameter conditions implying the second- and third-order stochastic dominance of the CPPI strategy. In particular,
restrictions on the CPPI multiplier resulting from the spread between the implied volatility and the empirical volatility
are analyzed. |
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