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Constant Proportion Portfolio Insurance Strategies under Cumulative Prospect Theory with Reference Point Adaptation

Khuman, Anil and Phelps, Steve and Constantinou, Nick (2012) Constant Proportion Portfolio Insurance Strategies under Cumulative Prospect Theory with Reference Point Adaptation. Working Paper. EBS Working Papers, Colchester.

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Abstract

Constant Proportion Portfolio Insurance (CPPI) is a significant and highly popular investment strategy within the structured product market. This has led to recent work which attempts to explain the popularity of CPPI by showing that it is compatible with Cumulative Prospect Theory (CPT). We demonstrate that this cannot explain the popularity of ratcheted CPPI products which lock-in gains during strong growth in the portfolio. In this paper we conjecture that CPPI investors not only follow CPT, but crucially that they also adapt their reference point over time. This important distinction explains investors preference for ratcheted products

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Constant Proportion Portfolio Insurance; Ratchets; Cumulative Prospect Theory; Adaptive Reference Point
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Science and Health > Computer Science and Electronic Engineering, School of > Centre for Computational Finance and Economic Agents
Depositing User: Jenny Connolly
Date Deposited: 02 Jan 2014 10:02
Last Modified: 02 Jan 2014 10:02
URI: http://repository.essex.ac.uk/id/eprint/8127

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