Performance and Sensitivity Analysis of the VaR-Based Portfolio Insurance Strategy

Abstract

This paper evaluates the empirical performance of the VaR Based Portfolio Insurance (VBPI) relative to the Constant Proportion Portfolio Insurance (CPPI) based on Swedish data for 1989-2011. The evaluation emphasizes on the two strategies’ ability to combine downside protection with upside potential, with the Omega measure as the main performance evaluator. Furthermore, the empirical implications of the inherent model risk of VBPI are evaluated with a sensitivity analysis focusing on the impacts of alternative estimates of the instantaneous growth rate and volatility of the risky asset. The conclusions of the paper are that the VBPI underperformed relative to CPPI on most performance measures, including Omega, in most scenarios during 1989-2011 and that the VBPI suffered severely from model risk.