<abstract xmlns="http://www.w3.org/1999/xhtml"><bold>Background:</bold> In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity.<bold>Objectives:</bold> The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio.<bold>Methods/Approach:</bold> Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns.<bold>Results:</bold> According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy.<bold>Conclusions:</bold> Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.</abstract>

Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity.Objectives: The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio.Methods/Approach: Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns.Results: According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy.Conclusions: Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.

Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

Bosna Bank International, Bosnia and Herzegovina

Business Systems Research Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Constant Proportion Portfolio Insurance Strategy in Southeast European Markets"}

Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital...

Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

Publicado en línea: 28 may 2016

Páginas: 59 - 80

Recibido: 24 jul 2015

Aceptado: 13 sept 2015

DOI: https://doi.org/10.1515/bsrj-2016-0005

Palabras clave
investments, portfolio insurance, constant proportion portfolio insurance, Monte Carlo simulations, interest rate models

© 2016 Elma Agić-Šabeta, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

Publicado en línea: 28 may 2016

Páginas: 59 - 80

Recibido: 24 jul 2015

Aceptado: 13 sept 2015

DOI: https://doi.org/10.1515/bsrj-2016-0005

Palabras claveinvestments, portfolio insurance, constant proportion portfolio insurance, Monte Carlo simulations, interest rate models

© 2016 Elma Agić-Šabeta, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Palabras clave
investments, portfolio insurance, constant proportion portfolio insurance, Monte Carlo simulations, interest rate models