A Study On Portfolio Insurance-A Theoretical & Empirical Discussion

Portfolio insurance is a kind of dynamic asset allocation, the main goal of which is to provide downside protection for the value of stock portfolio while preserving much of the upside potential. The general principle of portfolio insurance is to increase the size of stock invested in a bull market and decrease the percentage invested in a bear market. The performance of portfolio insurance is conditional on the choice of portfolio insurance strategy, the floor return of the insurance strategy, the percentage of the portfolio's assets covered by insurance, the risk(beta) of the underlying portfolio, the insurance strategy's horizon, the transaction costs, riskfree rate, adjustment methods and so on.My paper choice three methods of portfolio insurance: Synthetic Put(SP), Constant Proportion Portfolio Insurance(CPPI) and Time Invariant Portfolio Protection(TDPP) with different parameters. Using Monte Carlo simulation and empirical evidence on Shanghai Index and Shenzhen Index, this study compares different method's performance under ideal and real condition.Monte Carlo simulation confirms that portfolio insurance can be efficacious to provide downside protection for the value of stock portfolio while preserving much of the upside potential, but financing limit will greatly lower the income rate of CPPI with higher multiplier and TIPP when the market upswings.The main result of the paper is as follow:A. Portfolio insurance is suitable for Chinese securities market, Among which TIPP plays best in the long run with SP following.B. When insurance cover is set at 90%, both CPPI and TIPP can meet the requirement of insurance, no matter what market situation is. Meanwhile, there exists synthetic error for SP when the market dives down.C. As for SP is concerned, the risk where the volatility is estimated by moving is higher than the case where that is estimate by Garch(l,l).