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Financial Markets and Portfolio Management

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02.01.2017

How does the underlying affect the risk-return profiles of structured products?

verfasst von: Ji Cao

Erschienen in: Financial Markets and Portfolio Management | Ausgabe 1/2017

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Abstract

Regulators of some of the major markets have adopted value at risk (VaR) as the risk measure for structured products. Under the mean-VaR framework, this paper discusses the impact of the underlying’s distribution on structured products. We expand the expected return and the VaR of a structured product with its underlying’s moments (mean, variance, skewness, and kurtosis), so that the impact of the moments can be investigated simultaneously. Results are tested by Monte Carlo and historical simulations. The findings show that for the majority of structured products, underlyings with large positive skewness are preferred. The preferences for the variance and the kurtosis of the underlying are both ambiguous.

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It can easily be verified that two structured products with the same VaR do not necessarily have the same expected return.

In the literature, mean-VaR is one of the most discussed risk-return measures (e.g., Alexander and Baptista 2002; Consigli 2002; Tsao 2010).

A thorough discussion of the mean-variance efficient underlyings and the mean-VaR efficient structured products is beyond the scope of this paper.

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Titel: How does the underlying affect the risk-return profiles of structured products?
verfasst von: Ji Cao
Publikationsdatum: 02.01.2017
Verlag: Springer US
Erschienen in: Financial Markets and Portfolio Management / Ausgabe 1/2017
Print ISSN: 1934-4554
Elektronische ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-016-0281-9

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