Abstract
We propose an innovative approach for dynamic portfolio insurance that overcomes many of the limitations of the earlier techniques. We transform the Payoff Distribution Model, originally introduced by Dybvig [J. Business, 1988, 61(3), 369–393] as a performance measure, into a fund management tool. This approach allows us to generate funds with pre-specified distributional properties. Specifically, we generate funds that are characterized by a Left Truncated Gaussian distribution and then demonstrate out of sample, using different performance and risk measures, that this approach to managing market exposure leads to a better risk control at a lower cost than more popular techniques such as the CPPI.
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