A Study On Dynamic Portfolio Insurance Strategy Under Irrational Condition

As an important type of portfolio management technology,portfolio insurance strategy is widely used in investment decisions.Its main purpose is to avoid or hedge the risk of asset price falling,and to participate in the upward capital market on the premise of protecting the minimum risk exposure of investors.The application premise of traditional portfolio insurance strategy is that the market is efficient and market participants are rational,but periodic emergences of short-term violent fluctuations in stock market challenge traditional financial theory.Traditional economics attempts to study stock market anomalies by transforming utility functions and changing investors' expectations.However,its settings of invsetors always adhere to “rational person”,and the investor behavior model it uses is too simplified.This dissertation abandons the assumption of “effective market” and takes “investor irrationality” as a prerequisite for investigating effectiveness and applicability of portfolio insurance strategy.By integrating investment strategies with traditional portfolio insurance,this dissertation discusses the optimization of portfolio insurance strategies under irrational conditions: that is,with changes in the capital market and investors' psychological expectations,how to achieve better investment performance under premise of capital preservation.This dissertation draws on the research results of psychology,behavior and sociology,and systematically studies investors' decision-making behavior under irrational assumptions.Based on behavioral finance,taking stock market investors as research object,and combining realities of stock market,this dissertation combines investors' irrational behavior with portfolio insurance strategies,and comprehensively explores optimization of portfolio insurance strategies from the following perspectives: investor sentiments,subjective risk premium,visibility and weight,excessive extrapolation,limited attention,task complexity,color psychology,momentum and reversal effects,and style rotation effect of large and small stocks.And then the benefits of optimized strategies are decomposed.The two determinants of traditional portfolio insurance strategy are risk multiplier and composition of risk asset position.On the one hand,from the perspective of risk multiplier: firstly,by introducing investor sentiment and subjective risk premium to CPPI and TIPP strategy,fixed risk multiplier in traditional portfolio insurance strategy can be dynamically adjusted with market fluctions.By comparing returns of optimized dynamic portfolio insurance strategies under different market conditions,it is concluded that the performance of dynamic portfolio insurance strategies is generally better than traditional portfolio insurance strategies.Dynamic CPPI and TIPP strategies can solve the problem of insufficient returns of traditional portfolio insurance strategies.And optimized strategies could not only meet invseors' capital protection requirements,but also satisfy their income needs.Secondly,based on behavioral finance theories such as visibility and weight,excessive extrapolation,limited attention,task complexity,color psychology,this dissertation dynamically optimizes the risk multiplier based on the following two connections,which are rising market corresponds to red and falling market corresponds to green.The empirical result shows that during the bullish and consolidation period,dynamic portfolio insurance strategies based on rising and falling ratios could achieve higher returns.On the other hand,from the perspective of composition of risk asset position: firstly,based on the test of momentum and reversal effects in China's capital market,this dissertation finds that momentum strategy with formation period of 16 weeks and holding period of 1 week has the highest yield.Therefore,by applying it to risk position of traditional portfolio insurance strategy,the dissertation finds that the dynamic strategies adjusted based on momentum effects have higher levels of performance.Secondly,based on the test of rotation effect of large and small stocks,this dissertation finds that there is a rotation effect of large and small stocks in China's capital market.Based on this,this dissertation constructs portfolio insurance strategies based on moving average strategies and the trend and counter-trend strategie in order to improve the yield by changing the risk asset composition.The empirical results show that portfolio insurance strategies based on moving average strategy and the trend and counter-trend strategy can not only guarantee investors' principal,but also obtain higher returns than traditional portfolio insurance strategy.