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Portfolio insurance with ratcheted floor as a long-term asset management strategy: implications of loss aversion

Author

Listed:
  • Huai-I. Lee
  • Hsinan Hsu
  • Len-Kuo Hu
  • Ching-Chung Lin
Abstract
The existing literature has revealed that the performance of current portfolio insurance strategies as long-term asset management is limited. Prospect theory implies that creation of ladder return distributions by portfolio insurance can improve long-term asset management with criteria of loss avoidance and gain protection. Based on this principle, we propose the Ratcheted Floor Variable Proportion Portfolio Insurance (RF-VPPI) as a competing strategy with the Constant Proportion Portfolio Insurance (CPPI) and rolling-CPPI strategies. Simulations and empirical tests demonstrate that the RF-VPPI outperforms the CPPI and the rolling-CPPI in the long term.

Suggested Citation

  • Huai-I. Lee & Hsinan Hsu & Len-Kuo Hu & Ching-Chung Lin, 2011. "Portfolio insurance with ratcheted floor as a long-term asset management strategy: implications of loss aversion," Applied Economics Letters, Taylor & Francis Journals, vol. 18(15), pages 1449-1454.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:15:p:1449-1454
    DOI: 10.1080/13504851.2010.543062
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    References listed on IDEAS

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    9. Black, Fischer & Perold, AndreF., 1992. "Theory of constant proportion portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 403-426.
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    Cited by:

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    3. Ko, Hyungjin & Son, Bumho & Lee, Jaewook, 2024. "Portfolio insurance strategy in the cryptocurrency market," Research in International Business and Finance, Elsevier, vol. 67(PA).

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