Static Allocation Decisions in the Presence of Portfolio Insurance

This paper attemps to determine what fraction a static investor should optimally allocate to investment strategies with convex exposure to stock market returns in a general economy with stochastically time-varying interest rates and stock market excess returns.

Author(s):

Felix GoltzSenior

Research Engineer, EDHEC Risk and Asset Management Research Centre

Lionel Martellini

Professor of Finance and Scientific Director of the EDHEC Risk and Asset Management Research Centre

Koray D. Simsek

Associate Professor of Finance, EDHEC Business School

The results obtained using Monte Carlo analysis show that investors should allocate between 45% and 63% of their portfolio to such portfolio insurance strategies. Moreover, the inclusion of portfolio insurance strategies leads to important utility gains. Our results are robust with respect to the choice of the objective, the presence of realistic levels of market friction, heterogeneous expectations on volatility, and various parametric assumptions.

Type: Working paper
Date: le 04/05/2009
Research Cluster : Finance

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