Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity.

Objectives: The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio.

Methods/Approach: Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns.

Results: According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy.

Conclusions: Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.