Research On CPPI Strategy Based On The Investor Sentiment

Portfolio insurance is a good choice for risk-averse investors as a stop loss strategy. Investor’s total assets are divided into two parts of risky assets and risk-free assets. Investors guarantee a minimum portfolio value by investing in risk-free assets, thereby locking the downside risk of the portfolio. While they invest in risky assets is aiming for the increased earnings of these assets. Therefore, in the portfolio insurance model, investors will adjust the position of risk assets and risk-free assets simultaneously, in order to ensure the portfolio’s value is higher than the guarantee amount, and lock the downside risk.At present, the constant proportion portfolio insurance strategy(CPPI strategy) is more commonly used as a portfolio insurance strategy. It is simple to operate and easy to understand, so it is well received by investors. However, this strategy assumes risk multiplier is fixed. In fact, for investors in different time and space, their affordability is different in terms of the degree of risk and expected risk volatility. Therefore, many scholars begin to optimize the CPPI strategy, including the adjustment of risk multiplier. Risk multiplier(risk tolerance), also known as risk appetite, it is generally within the limit of acceptable risk deviation. Typically, investors choose the higher risk multiplier, indicating they have a lower degree of risk aversion. And investor sentiment will also have a direct impact on risk aversion, investors are more optimistic, the smaller the risk aversion coefficient, and vice versa. So the investor sentiment can be introduced into the CPPI strategy, not only meet the goal of maximizing the effectiveness of the investors, but also manage the investor sentiment effectively.Financial product design not only takes into account people’s psychological loss aversion, but also to meet the psychological needs of investors gambling. Portfolio insurance is a means of financial product design, it also exist to cater to investor psychology behavior, so portfolio insurance will be affected by investor psychology factors. This article assumes that investors are risk averse, and they make investment decisions based on their utility-maximizing, by introducing the investor sentiment to portfolio insurance to discuss the impact of sentiment changes on portfolio insurance strategy. First, this paper makes a classification of the existing portfolio insurance strategy, researching on the operation mechanism of CPPI strategy; Subsequently, combining the definition of investor sentiment, the paper builds a comprehensive sentiment indicator by using principal component analysis; Then, we introduce the investor sentiment in portfolio insurance which based on utility function of investor sentiment, and build a CPPI strategy based on investor sentiment with the objective of maximizing utility, and to discuss the conditions of the use of the model; Finally, through an empirical study based on China’s stock market data, the paper evaluates the performance of portfolio insurance strategies based on the inventor sentiment.The paper finds that the investors do not invest when the expected return is less than the risk-free rate of return, or they should choose a lower risk multiplier; when the risk assets expected return is greater than the risk-free rate of return, investor should select the optimal risk multiplier for the rational allocation of its own assets in order to achieve the maximum benefits and the least risk; when risk assets expected rate of return is greater than the risk-free rate of return on assets, but investors in excessive optimism and excessive pessimism, it is also difficult to balance the relationship between risk and return, so only in relative rationality, investors will consider the rational allocation of their own assets to invest, in this case, investors choose risk multiplier based on their utility maximization; and the risk multiplier and investor sentiment are positively correlated. Thus, we find that the upper and the lower limit of risk multiplier in CPPI strategy can suppress the extreme emotional impact, and manage investor sentiment in order to suppress the loss caused by extreme emotions.