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A new choice of dynamic asset management: the variable proportion portfolio insurance

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Abstract:

The constant proportion portfolio insurance (CPPI) achieves the advantage of simplicity due to its constant multiple. However, a dynamic multiple could improve the effectiveness of portfolio management. In this article, we provide a complete and detailed examination of the mechanism of variable proportion portfolio insurance (VPPI) strategy. The multiple of the VPPI states that when the stock price goes up, the multiple gets larger accordingly and when the stock price goes down, the multiple gets smaller. A portfolio insurance strategy with this discipline could yield better performance. Based on this principle, we recommend an exponential proportion portfolio insurance (EPPI). In addition, we also propose a new performance measure for portfolio insurance. Compared with the CPPI, simulation and empirical evidence support that the EPPI works better in both upside capture and downside protection, implying that the EPPI could be an effective tool for asset management.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840600949280

Affiliations: 1: Department of Business Administration, National Cheng Kung University, Taiwan,Department of Finance, Wufeng Institute of Technology, Taiwan 2: The Institute of International Business, National Cheng Kung University, Taiwan 3: Department of Finance, Feng Chia University, Taiwan

Publication date: August 1, 2008

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