Synthetic portfolio insurance on the Italian stock index: From theory to practice

Abstract

We claim here that a practical way to create synthetic portfolio insurance on the Italian stock market index (not currently traded) should be to select a portfolio of a small number of Italian blue chips properly composed so as to be a good proxy of the market index, and to revise proportions between the proxy and the risk-free asset only if the difference between the current composition and the theoretically optimal one exceeds some fixed bound so as to squeeze transaction costs. With reference to a three-year weekly data base of the Milan Stock Exchange, this paper reports results of a test of efficiency of strategies of this type in granting synthetic portfolio insurance.