On the Stochastic Dominance of Portfolio Insurance Strategies

Abstract

This paper compares the performance of the two main portfolio insurance strategies, namely the Option-Based Portfolio Insurance (OBPI) and the Constant Proportion Portfolio Insurance (CPPI). For this purpose, we use the stochastic dominance approach. We provide several explicit sufficient conditions to get stochastic dominance results. When taking account of specific constraints, we use the consistent statistical test proposed by Barret and Donald [1]. It is similar to the Kolmogrov-Smirnov test with a complete set of restrictions related to the various forms of stochastic dominance. We find that the CPPI method can perform better than the OBPI one at the third order stochastic dominance.