Portfolio Insurance Contracts Linked to Hedge Funds

Chekib Ezzili

Abstract


We stress the importance of modeling the evolutionof hedge funds NAV following a jump-diffusionprocess in order to properly assess a contract ofportfolio insurance managed following the cushionmethod (CPPI). This choice is explained partly bythe statistical properties of hedge fund returns, andalso by the impact on the price of such contractsthrough the increase in the price of the Gap optionembedded in the contract. We show through the useof non-parametric statistical methods (BarndorffNielsenand Shephard (2004), and Bollerslev et al.(2008)) that returns of hedge funds have a level ofjump activity similar to that present in the equityindices. Then we show the existence of a commonfactor between hedge funds and equity indicescorresponding to a systemic jump. Finally, wepresent numerical results in order to understand theimpact of the various parameters of the jumpdiffusionprocess on the CPPI valuation.

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Copyright (c) 2016 Chekib EZZILI

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.