A comparative study of Portfolio Insurance Strategies with Transaction Costs

• Main Authors: Cheng, Chung-Chieh, 鄭仲傑
• Other Authors: 王雍智
• Format: Others
• Language: zh-TW
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/89874363014855547610

碩士 === 國立高雄應用科技大學 === 金融資訊研究所 === 95 === Portfolio Insurance strategy has long been an important issue for investment. Fund managers, on one hand, wish to have a portfolio insurance strategy to protect from downside risk of investment when the market is unfavorable. On the other hand, they hope to the strategy can preserve potential profits when the market is favorable. In this study, we argue that transaction costs are a non-trivial factor in influencing the performance of portfolio insurance strategies. Transaction costs should not only include explicit costs such as brokerage fee and transaction tax, but also include implicit costs such as bid-ask spread. We will consider how rebalancing frequency affects the performance of various portfolio strategies, in order for determining optimal rebalancing frequency. The study provides practitioners with optimal portfolio insurance strategy with transaction cost minimized. Earlier studies on portfolio insurance mostly focus on reducing replicating errors, but not paying too much attention to increasing transaction costs in rebalance adjustments. The main purpose of the study is to derive optimal portfolio insurance strategy with minimum transaction costs and replicating errors. We apply Monte Carlo simulation to historically simulate Taiwan Weighted Stock Index to compare the performance of a variety of portfolio insurance strategies. The strategies of consideration are protective puts (PP), synthetic put option (SPO), constant proportion portfolio insurance (CPPI), constant mix (CM), and time-invariant portfolio protection (TIPP). In this study, it is found that the optimal portfolio insurance strategy which rebalancing frequency were different in different markets. Based on the result, each portfolio insurance strategy with different market trend has different best adjustment frequency and parameter. It is found that synthetic put option has the best performance in bull market and time-invariant portfolio insurance strategy has a better diversification effect.