Best portfolio insurance for long-term investment strategies in realistic conditions

Constant proportion portfolio insurance (CPPI) strategies implemented in continuous time on asset prices following geometric Brownian processes are expected utility maximising for investors with HARA utilities. But, in reality, these strategies are implemented in discrete time and asset prices might jump. We show that under these more realistic circumstances, optimal CPPI strategies are still superior to optimal option based portfolio insurance (OBPI) strategies. The effects of discrete replication and jumps on optimal strategy parameters and certainty equivalent returns (CER) are examined by simulation and turn out to be minor in typical circumstances. Hence the much discussed gap risks are unimportant for investors in both portfolio insurance strategies and comparable for insurers of the gap risks.

► We compare the two most popular portfolio insurance strategies: CPPI and OBPI. ► We use certainty equivalents as the performance measure. ► CPPI dominates OBPI even when implemented in discrete time and when markets might jump. ► Gap risk proves unimportant for both portfolio insurance strategies.