Author

Olga Biedova

Date of Award

2020

Document Type

Dissertation

Degree Name

PhD in Business

Department

Department of Mathematical Sciences: Business Analytics

First Advisor

Victoria Steblovskaya

Second Advisor

Winston S. Buckley

Third Advisor

Jahangir Sultan

Fourth Advisor

Gianluca Fusai

Abstract

Portfolio insurance strategies are very popular investment solutions that provide an investor with capital protection as well as allow for an equity market participation.

This dissertation focuses on two portfolio insurance strategies: Constant Proportion Portfolio Insurance (CPPI), one of the most popular strategies, and Volatility Target Portfolio Insurance (VTPI), a modified version of an Option Based Portfolio Insurance (OBPI). This dissertation follows a three-paper model.

In paper one, we propose a two-step approach to the numerical optimization of the CPPI main parameter, multiplier. First, we identify an admissible range of the multiplier values by controlling the shortfall probability (chosen as a measure of the gap risk). Second, within the admissible range, we choose the optimal multiplier value with respect to the omega ratio (chosen as a performance measure). We illustrate the performance of our optimization algorithm on simulated CPPI paths in the Black-Scholes environment with discrete trading as well as on the historical S\&P 500 data using the block-bootstrap simulations.

In paper two, we introduce and implement the VTPI strategy, a modified version of the OBPI strategy in which an embedded option is linked to a Volatility Target (VolTarget) portfolio instead of a pure risky asset.

A VolTarget portfolio is constructed in such a way that the overall portfolio volatility is maintained very close to the prespecified value, the volatility target. The VTPI strategy leads to higher participation in the market compared to the standard OBPI strategy. We illustrate how the VTPI strategy works in different market scenarios as well as in the real financial market.

In paper three, we use stochastic dominance rules to compare two portfolio insurance strategies: CPPI and VTPI. The performance of the CPPI strategy is often compared to that of the OBPI. The OBPI strategy often fails to outperform the CPPI strategy due to high option prices, particularly because of high volatility levels of the underlying asset and the volatility spread associated with it. The VTPI strategy can potentially overcome this problem because the volatility of the underlying asset is held under control. This leads to lower option prices and higher participation rates.

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