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

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  • Ji Cao

    (Nankai University)

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.

Suggested Citation

  • Ji Cao, 2017. "How does the underlying affect the risk-return profiles of structured products?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(1), pages 27-47, February.
    • Handle: RePEc:kap:fmktpm:v:31:y:2017:i:1:d:10.1007_s11408-016-0281-9
    DOI: 10.1007/s11408-016-0281-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Value at risk; Structured products; Skewness; Kurtosis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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