Hedge inflation risk of specific purpose guarantee funds

Ze Chen, Bingzheng Chen, Yi Hu, Hai Zhang

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)1
Number of pages36
JournalEuropean Financial Management
Early online date2 Oct 2021
DOIs
Publication statusE-pub ahead of print - 2 Oct 2021

Keywords

  • CPPI
  • portfolio insurance
  • prospect theory
  • specific purpose guarantee funds

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