Do Futures-Based Strategies Enhance Dynamic Portfolio Insurance?

In this paper we investigate the relative performance of two approaches to dynamic portfolio insurance: the synthetic put and the Constant Proportion Portfolio Insurance (CPPI). The investigation is conducted on the Australian market, over a sample period of 59 non-overlapping quarters from December 1987 to December 2002. Its main contribution is to provide a comprehensive assessment of the two approaches under different market conditions, and the testing of ex ante information as an input into the trading program. The major finding is that the futures-based implementation of both synthetic put and the CPPI approach is robust to both tranquil and turbulent market conditions in preserving the desired floor. The fact that this conclusion includes the case of employing implied volatility (obtained from the options market) is highly encouraging as it suggests high implementability of the strategy. Notably, the risk-return tradeoff shows that portfolio insurance using this volatility measure yields a return that is 64 basis points over the risk free investment.