Flexible CPPI in Regime Switching Models

The constant proportion portfolio insurance (CPPI) is a dynamic strategy of investment protecting a fund against a fall of its market value below a predetermined floor. In this paper, various CPPI strategies with flexible floor values are designed and compared. A problem associated with dynamic portfolio insurance strategies such as CPPI is the “gap risk” which is the risk of failing to achieve the guarantee at the maturity. This risk will be taken into account based on a regime switching dynamics. The main contribution of the present research is to use a switching regime model to formulate different portfolio insurance methods in which minimum guarantees on the portfolio values are under the assumption of stochastic floor processes.