Discrete-Time CPPI Under Transaction Cost and Regime Switching

Abstract

This paper studies the performance of discrete-time constant proportional portfolio insurance (CPPI) under proportional trading cost and regime switching. Explicit formulas are developed for a variety of measures for the performance of a CPPI portfolio, and a double-sided Laplace inversion method is developed to compute the Omega measure of a CPPI portfolio. The established formulas can be easily implemented for sensitivity analysis on performance of a CPPI portfolio, and a numerical example with a real data set of S&P 500 index is presented to illustrate the effects the regime switching feature of the financial market and the existence of transaction cost can exert on the performance of a CPPI portfolio.

Keywords: Finance, Investment analysis, Risk management, Markov processes, Constant proportion portfolio insurance, Regime switching