Research On Advantages Of Portfolio Insurance Strategies Based On Prospect Theory

Portfolio insurance strategies have been sought after by investors since their emergence,but some studies have shown that portfolio insurance strategies can increase market volatility and even lead to financial crises.Although the portfolio insurance strategy has such shortcomings,it is still the first choice for investors to make risky decisions.Therefore,looking for the reasons for the popularity of portfolio insurance strategies and studying the advantages of strategies are the key to explaining and studying investor decision-making behaviors.The traditional expected utility theory is based on the assumption of an efficient market and a rational person.It ignores the influence of investors’ risk attitude and psychological characteristics in the actual investment process,and it is difficult to effectively explain the popular phenomenon of portfolio insurance strategies.With the continuous emergence of financial market anomalies,behavioral finance believes that the psychological factors of limited rational investors play a key role in investment ideas and investment decisions.In this context,the focus of explaining the reasons for the popularity of portfolio insurance strategies has turned to exploring the decision-making process of investment behavior from a psychological perspective.This article believes that the introduction of a prospective theoretical framework to analyze the reasons for the popularity of portfolio insurance strategies can significantly improve the explanation.Prospect theory is the core theory of behavioral finance,and it is more suitable for describing investors’ decision-making behavior under uncertainty.This paper studies the advantages of portfolio insurance strategies based on prospect theory,and explains the reasons for its attractiveness from the perspective of theoretical analysis and empirical research.In the theoretical part,this article compares and analyzes the prospect theory and expected utility theory.Under the expected utility theory,investors’ decision-making on portfolio insurance strategies is based on the utility of the ultimate wealth.Under the prospect theory,investors make decisions based on the maximization of prospect value,because the effects of investor psychological characteristics and behavior characteristics are considered.Therefore,it is more effective to study the advantages of portfolio insurance strategies under the framework of prospect theory;In the empirical part,the Monte Carlo simulation of 9 market scenarios and the daily closing price of the Shanghai and Shenzhen 300 Index is used to calculate the expected utility value and prospect value of the portfolio insurance strategy and benchmark strategy.The comparative proof of the advantages of the portfolio insurance strategy under the prospect theory.The empirical results show that under the expected utility theory,the utility value of the portfolio insurance strategy is smaller than the utility value of the benchmark strategy,and in the prospect theory,in most scenarios,the prospect value of the portfolio insurance strategy is greater than the prospect value of the benchmark strategy.According to the investors’ expected utility and the principle of maximizing the prospect value,the portfolio insurance strategy based on the prospect theory has advantages.Both theoretical analysis and empirical research show that analyzing the advantages of portfolio insurance strategies under the framework of prospect theory is more effective and can better explain the reasons for the popularity of portfolio insurance strategies.This article provides a new way for domestic research on portfolio insurance strategies,lays the foundation for further research on portfolio insurance strategies,and provides some theoretical support for explaining investor behavior in the financial field.