An analysis of risk-based asset allocation and portfolio insurance strategies |
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Authors: | Lan-chih Ho John Cadle Michael Theobald |
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Institution: | (1) Department of Foreign Exchange, Central Bank of the Republic of China (Taiwan), 2, Roosevelt Road, Sec. 1, Taipei, 10066, Taiwan, ROC;(2) Accounting and Finance Subject Group, University of Birmingham, Birmingham, UK |
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Abstract: | This paper compares traditional portfolio insurance strategies with modern risk-based dynamic asset allocation strategies
within a currency portfolio context for reserve management. Given the objective of preserving reserve value, the evaluation
of the hedging performances of various strategies focuses on four perspectives regarding, in particular, the return distribution
of the hedged portfolio. In terms of the Sharpe Ratio, the constant proportional portfolio insurance is the best performer
due to having the lowest volatility, while the Value at Risk strategy based upon the normal distribution is the worst due
to its having the smallest return. From the perspective that the return distribution of the hedged portfolio is shifted to
the right, the synthetic put performs the best, with the expected shortfall strategy the second best. In terms of the cumulative
portfolio return across years, the expected shortfall strategy using the historical distribution ranks first, as a result
of its participation in upward markets. Furthermore, the expected shortfall-based strategy results in a lower turnover within
the investment horizon, thereby saving transaction costs. |
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