| Article ID: | iaor20114105 |
| Volume: | 185 |
| Issue: | 1 |
| Start Page Number: | 75 |
| End Page Number: | 103 |
| Publication Date: | May 2011 |
| Journal: | Annals of Operations Research |
| Authors: | Zagst Rudi, Kraus Julia |
| Keywords: | insurance, option trading, portfolio selection, stochastic dominance |
The purpose of this article is to analyze and compare two standard portfolio insurance methods: Option‐based Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance (CPPI). Various stochastic dominance criteria up to third order are considered. We derive parameter conditions implying the second‐ and third‐order stochastic dominance of the CPPI strategy. In particular, restrictions on the CPPI multiplier resulting from the spread between the implied volatility and the empirical volatility are analyzed.