The effectiveness of the VaR-based portfolio insurance strategy: An empirical analysis

Abstract

This paper proposes an approach to constructing the insured portfolios under the VaR-based portfolio insurance strategy (VBPI) and provides a comprehensive analysis of its hedging effectiveness in comparison with the buy-and-hold (B&H) as well as the constant proportion portfolio insurance (CPPI) strategies in the context of the Chinese market. The results show that both of the insurance strategies are able to limit the downward returns while retaining certain upside returns, and their capabilities of reshaping the return distributions increase as the guarantee or the confidence level rises. In general, the VBPI strategy tends to outperform the CPPI strategy in terms of both the degree of downside protection and the return performance.