Portfolio Insurance: the Extreme Value Approach to the CPPI Method
Jean-Luc PRIGENT – University of Cergy-Pontoise THEMA

This paper applies the extreme value theory to the Constant Proportion Portfolio Insurance (CPPI). A quantile hedging approach is introduced, which provides an upper bound on the multiple (the key parameter). This bound is statistically estimated from the behavior of extreme variations in asset returns rates. We illustrate our results on S&P 500 data. We show how the multiple can be chosen to satisfy the guarantee condition at a given probability level.

Jean-Luc Prigent

Jean-luc Prigent is professor of Economics and Finance at the University of Cergy-Pontoise and THEMA member. He holds a PhD in Mathematics and two “habilitations” in Economics and Management Sciences. Scientific consultant for several financial institutions, he has published numerous research articles on portfolio optimization, option valuation and hedging, and also on financial risk management. To know more…

  
“The financial portfolio optimization requires taking account of extreme events in order to avoid too large losses. It is especially true when dealing with financial structured products. This paper illustrates such feature for one of the main portfolio insurance method, namely the Constant Proportion Portfolio Insurance (CPPI).”
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