Guaranteed stop orders as portfolio insurance – An analysis for the German stock market

In this study, we analyze the effects of Guaranteed Stop Orders (GSOs) on stocks in the German stock index DAX. We briefly explain how GSOs work and then we develop a jump process, based on a Variance Gamma Process, to model the share prices. We show through simulations that the payoff of a GSO is primarily governed by volatility in the underlying stocks’ intraday and overnight movements. We also demonstrate that the common linear approach to price-GSOs is too general and needs to be refined in order to show adequately differences between stocks. We show that recent turbulence in stock markets around the world has made the GSO more interesting and that, further during normal periods, this order type was nearly irrelevant.