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

Huai I. Lee, Min-Hsien Chiang, Hsinan Hsu

Research output: Contribution to journalArticle

7 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)2135-2146
Number of pages12
JournalApplied Economics
Volume40
Issue number16
DOIs
Publication statusPublished - 2008 Aug 1

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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