Stochastic dominance of portfolio insurance strategies - OBPI versus CPPI

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. Key words Portfolio insurance, CPPI, OBPI, stochastic dominance, volatility spread, risk-averse investor

• Type: Journal
• Year: 2011
• Where: ANOR
• Authors: Rudi Zagst, Julia Kraus
• Keywords: ANOR 2011, Constant Proportion Portfolio Insurance, Portfolio Insurance, Stochastic Dominance