Management Review

›› 2018, Vol. 30 ›› Issue (8): 43-57.

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Investor Sentiment and Optimizing Risk Multiplier of CPPI

Yao Yuan1, Jiang Yafang1, Zhai Jia2   

  1. 1. Institute for Management Science and Engineering, Henan University, Kaifeng 475004;
    2. Salford Business School, University of Salford, Salford M5 4WT
  • Received:2017-07-29 Online:2018-08-28 Published:2018-08-31

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Abstract:

CPPI strategy as a hedge financial product, in which the investor risk preference parameter m can be adjusted according to the impact of investor sentiment on risk demand. To improve the profitability of the strategy, both the expected return of investors' loss aversion psychology and the psychological needs of certain gambling investors need to be considered. Therefore, this paper introduces the investor sentiment in the CPPI strategy, sets up the CPPI strategy model based on the investor emotion under the condition of limiting the risk multiplier adjustment range, and discusses the influence of the investor sentiment on the CPPI strategy in order to improve the strategic benefits, and inhibit the impact of extreme emotions. The results show that when the investor's expected rate of return is less than the return on risk-free assets, the risk asset is not invested in or the risk asset is selected at the lower limit of the CPPI 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 maximize the benefits and minimize the risk. When investors are excessively optimistic or pessimistic, it is also difficult to balance the relationship between risk and return, and the strategy investors choose the risk multiplier based on their own utility maximization, the risk multiplier is positively correlated with investor sentiment. The empirical results of three strategies show that the CPPI strategy of investor sentiment is better in bull market and bear market, but its advantage is not obvious in the adjustment period.

Key words: investor sentiment, CPPI, risk aversion, utility function