Portfolio insurance: a simulation under different market conditions

  • Bird R
  • Cunningham R
  • Dennis D
 et al. 
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Abstract

In recent years, considerable interest has arisen over the methods and effects of equity portfolio insurance. The present paper outlines a simple method for implementing portfolio insurance and then reports the results of Monte Carlo simulations based on recent experience in the Australian equities market. The simulations are applied to three decision variables, namely; the rebalancing trigger, the locking in of gains and the insurance period. The decision variables were evaluated on the basis of their implementation costs, path dependency and the incidence of negative returns. Our analysis indicates that the technique outlined in the paper is robust with respect to a variety of market conditions, including the stock market crash of October, 1987. © 1990.

Author-supplied keywords

  • Option
  • Path dependency
  • Portfolio insurance
  • Returns

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Authors

  • Ron Bird

  • Ross Cunningham

  • David Dennis

  • Mark Tippett

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