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Capital Protected Notes for Loss Averse Investors : A Counterintuitive Result

Author

Listed:
  • Patrick Roger

    (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

Abstract

Capital protected notes are very popular structured products since the internet bubble burst in 2000. Investors are protected against large losses they could suffer if they were investing directly in the underlying index or portfolio of stocks. It then seems intuitive that such products are attractive for loss averse investors. However, using a simple version of cumulative prospect theory, we show that these products are not attractive when the investor takes either the underlying index or the risk-free investment as the reference point. She always prefer an investment in the index or in the risk-free portfolio, depending on her coefficient of loss aversion.

Suggested Citation

  • Patrick Roger, 2008. "Capital Protected Notes for Loss Averse Investors : A Counterintuitive Result," Working Papers of LaRGE Research Center 2008-16, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2008-16
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    File URL: http://ifs.u-strasbg.fr/large/publications/2008/2008-16.pdf
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    Cited by:

    1. Rania HENTATI & Jean-Luc PRIGENT, 2010. "Structured Portfolio Analysis under SharpeOmega Ratio," EcoMod2010 259600073, EcoMod.
    2. Doron Sonsino & Yaron Lahav & Yefim Roth, 2022. "Reaching for Returns in Retail Structured Investment," Management Science, INFORMS, vol. 68(1), pages 466-486, January.
    3. André de Palma & Nathalie Picard & Jean-Luc Prigent, 2009. "Prise en compte de l'attitude face au risque dans le cadre de la directive MiFID," Working Papers hal-00418892, HAL.

    More about this item

    Keywords

    Structured finance; prospect theory; loss aversion; capital protection.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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