Average Portfolio Insurance Strategies
Abstract: We design average portfolio insurance (API) strategies with an investment floor and a buffer that is a power of a geometric average of the underlying asset price. We prove that API strategies are optimal for investors with hyperbolic absolute risk aversion who become progressively more risk averse over time. During the averaging period, API strategies reduce the proportion of wealth allocated to the risky asset, which is the traditional life cycle investment recommendation. We compare the sensitivities of the fair price of equivalent payoffs generated by average and constant proportion portfolio insurance strategies and illustrate the performance of API strategies.
|Published on||24th January 2012|
|Authors||Jacques Pézier and Johanna Scheller|