Hedge inflation risk of specific purpose guarantee funds

Ze Chen; Bingzheng Chen; Yi Hu; Hai Zhang

doi:10.1111/eufm.12338

Hedge inflation risk of specific purpose guarantee funds

Ze Chen, Bingzheng Chen, Yi Hu, Hai Zhang

Accounting And Finance

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

31 Downloads (Pure)

Abstract

Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are popular among investors with both specific investment purpose and guaranteed return requirement, but receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund (floor) and a purpose-related portfolio (cushion) to maximize prospect theory investors' utility with consideration of their purpose-related inflation risk. Our closed-form
solution of optimal PO-CPPI allocation derived in the continuous time case and Monte-Carlo simulations in the discrete-time and dynamic cases prove the superiority of PO-CPPI over general portfolio insurance strategies.

Original language	English
Pages (from-to)	1104-1136
Number of pages	33
Journal	European Financial Management
Volume	28
Issue number	4
Early online date	2 Oct 2021
DOIs	https://doi.org/10.1111/eufm.12338
Publication status	Published - 17 Oct 2021

Keywords

CPPI
portfolio insurance
prospect theory
specific purpose guarantee funds

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1111/eufm.12338

Chen-etal-EFM-2022-Hedge-inflation-risk-of-specific-purpose-guarantee-fundsAccepted author manuscript, 1.23 MB

Cite this

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title = "Hedge inflation risk of specific purpose guarantee funds",

abstract = "Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are popular among investors with both specific investment purpose and guaranteed return requirement, but receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund (floor) and a purpose-related portfolio (cushion) to maximize prospect theory investors' utility with consideration of their purpose-related inflation risk. Our closed-formsolution of optimal PO-CPPI allocation derived in the continuous time case and Monte-Carlo simulations in the discrete-time and dynamic cases prove the superiority of PO-CPPI over general portfolio insurance strategies.",

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T1 - Hedge inflation risk of specific purpose guarantee funds

AU - Chen, Ze

AU - Chen, Bingzheng

AU - Hu, Yi

AU - Zhang, Hai

PY - 2021/10/17

Y1 - 2021/10/17

N2 - Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are popular among investors with both specific investment purpose and guaranteed return requirement, but receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund (floor) and a purpose-related portfolio (cushion) to maximize prospect theory investors' utility with consideration of their purpose-related inflation risk. Our closed-formsolution of optimal PO-CPPI allocation derived in the continuous time case and Monte-Carlo simulations in the discrete-time and dynamic cases prove the superiority of PO-CPPI over general portfolio insurance strategies.

AB - Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are popular among investors with both specific investment purpose and guaranteed return requirement, but receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund (floor) and a purpose-related portfolio (cushion) to maximize prospect theory investors' utility with consideration of their purpose-related inflation risk. Our closed-formsolution of optimal PO-CPPI allocation derived in the continuous time case and Monte-Carlo simulations in the discrete-time and dynamic cases prove the superiority of PO-CPPI over general portfolio insurance strategies.

KW - CPPI

KW - portfolio insurance

KW - prospect theory

KW - specific purpose guarantee funds

UR - https://onlinelibrary.wiley.com/journal/1468036x

U2 - 10.1111/eufm.12338

DO - 10.1111/eufm.12338

M3 - Article

SN - 1354-7798

VL - 28

SP - 1104

EP - 1136

JO - European Financial Management

JF - European Financial Management

IS - 4

ER -

Hedge inflation risk of specific purpose guarantee funds

Abstract

Keywords

UN SDGs

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