An empirical study of the performance of the Portfolio Insurancethrough the adjustment of risk paramter

• Main Authors: Pei-Fang Hong, 洪佩芳
• Other Authors: Jong-Rong Chiou
• Format: Others
• Language: zh-TW
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/30678189843848294668

碩士 === 淡江大學 === 財務金融學系碩士在職專班 === 96 === Portfolio insurance is designed to give investors the ability to participate in upward market movements while limiting downside risk. The Time-Invariant Portfolio Protection (TIPP) and Constant Proportion Portfolio Insurance (CPPI) are the two relatively simpler portfolio insurance strategies among the currently available ones. Since investors’ attitude towards risk, as pointed out in the behavioral finance, does not stay constant, the thesis studies the performance of the TIPP and CPPI together with the dynamical adjustment of their M multiplier in response to the change in the investors’ risk attitude and hedging needs. In general, investors’ attitude toward risk is affected by their portfolio performance and their market view. Although technical analysis has long been widely used, recent academic study has found implied volatility to be a more effective predictor of the change in market irection. Therefore, this research employs implied volatility as a parameter in gauging investors’risk attitude and in adjusting the M multiplier. Considering that the implied volatility of puts (IVp) could reflect the panic demand for hedging during periods of market turmoil and the implied volatility of calls (IVc) could IV incorporate the anticipated bullish sentiment, this research adopts, in addition to the volatility index (VIX) which uses the same calculation as CBOE VIX, also IVc and IVp to understand the suitability of each parameter applied in TIPP and CPPI. For the study period of 2003/06/30 to 2007/10/09, this research, through the value of IVp, IVc,and VIX associated with the TAIEX related high and low, dynamically adjusts the TIPP and CPPI risk profile multiplier M to evaluate the portfolio’s risk adjusted return. The following findings are observed: 1. The performance varies greatly with different evaluation periods. 2. For a downtrend period and analyzed from the Mean-Variance viewpoint, the TIPP and CPPI produce the best performance when the multiplier M is set constant at 2. But, if the multiplier M is variable, in terms of risk adjusted return, TIPP is better than CPPI which is in turn better than the Buy and Hold strategy regardless of which of the IVp, IVc or VIX is used. When the use of IVp, IVc, and VIX is further examined, IVp produces the highest return but also highest risk. 3. For an uptrend period and analyzed from the Mean-Variance viewpoint, the TIPP and CPPI produce the highest return with highest risk when the multiplier M is set constant at 6. But, if the multiplier M is variable, in terms of rate of return, Buy and Hold strategy is better than CPPI which is in turn better than TIPP regardless of which of the IVp, IVc or VIX is used. When the use of IVp, IVc, and VIX is further examined, IVc produces the highest return and also the highest risk if employed in CPPI. 4. For the whole evaluation period consisting of both uptrend and downtrend periods with the uptrend periods outnumbering the downtrend period, fixing the value of multiplier M may not necessarily produce a better performance than varying it. Also, in terms of rate of return, while Buy and Hold strategy appears to be better than CPPI which is better than TIPP, it also produces the highest risk. Further analysis of the use of IVp, IVc and VIX reveals that the use of IVp produces the best rate of return but also the highest risk.