Portfolio Insurance Strategies: Review of Theory and Empirical Studies

Abstract

A portfolio insurance strategy is a dynamic hedging process that provides the investor with the potential to limit downside risk while allowing participation on the upside so as to maximize the terminal value of a portfolio over a given investment horizon. First, this paper introduces the basic concepts and payoffs of a portfolio insurance strategy. Second, it describes the theory of alternative portfolio insurance strategies. Third, it empirically compares the performances of various portfolio insurance strategies during different markets and time periods. Fourth, it summaries the recent market developments of portfolio insurance strategies, especially in terms of the variations of features in CPPI investments. Finally, it addresses the impacts of these strategies on financial market stability.