One-dimensional pricing of CPPI

DOI10.1080/1350486X.2010.486571MaRDI QIDQ2889584zbMATH OpenFDO

Authors Louis Paulot, Xavier Lacroze

Publication date 8 June 2012

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0905.2926

zbMATH Keywords

option pricingportfolio insuranceMarkovgap riskCPPI

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10)

Abstract: Constant Proportion Portfolio Insurance (CPPI) is an investment strategy designed to give participation in the performance of a risky asset while protecting the invested capital. This protection is however not perfect and the gap risk must be quantified. CPPI strategies are path-dependent and may have American exercise which makes their valuation complex. A naive description of the state of the portfolio would involve three or even four variables. In this paper we prove that the system can be described as a discrete-time Markov process in one single variable if the underlying asset follows a homogeneous process. This yields an efficient pricing scheme using transition probabilities. Our framework is flexible enough to handle most features of traded CPPIs including profit lock-in and other kinds of strategies with discrete-time reallocation.

Recommendations

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Cites work

• Optimum consumption and portfolio rules in a continuous-time model

Cited in

(10)

• Model for dynamic multiple of CPPI strategy
• Options on constant proportion portfolio insurance with guaranteed minimum equity exposure
• Conic CPPIs
• Constant proportion portfolio insurance strategies in contagious markets
• Multiplier optimization for constant proportion portfolio insurance (CPPI) strategy
• Model-free CPPI
• Effectiveness of CPPI strategies under discrete-time trading
• Pricing and hedging of the defaultable CPPI with jump processes
• Analysis of the CPPI strategy for index portfolio at the Warsaw stock exchange
• Option on a CPPI

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