Constant Proportion Portfolio Insurance Strategies under Cumulative Prospect Theory with Reference Point Adaptation

Constant Proportion Portfolio Insurance (CPPI) is a significant and highly popular investment strategy within the structured product market. This has led to recent work which attempts to explain the popularity of CPPI by showing that it is compatible with Cumulative Prospect Theory (CPT). We demonstrate that this cannot explain the popularity of ratcheted CPPI products which lock-in gains during strong growth in the portfolio. In this paper we conjecture that CPPI investors not only follow CPT, but crucially that they also adapt their reference point over time. This important distinction explains investors' preference for ratcheted products