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A Cumulative Prospect View on Portfolios that Hold Structured Products

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  • Jürgen Vandenbroucke

Abstract

Many investors hold structured products in their portfolio. The current paper develops a break-even analysis on how this presence of structured products can be understood based on cumulative prospect theory. The framework provides additional insights into the behavioral conditions and required return expectations that make investors buy into expensive structured products with uncertain rewards. We make the strong assumption that the structured product has a zero prospect value when considered as a stand-alone investment. Still the optimized portfolio typically includes structured products. The degree of probability distortion determines the entry of structured products in the optimal portfolio. Once included it is the curvature of the value function that guides the actual weight of structured products and the potential increase in portfolio prospect value. Structured products receive a higher weight and increase the portfolio prospect value more if the investor is less conservative.

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  • Jürgen Vandenbroucke, 2015. "A Cumulative Prospect View on Portfolios that Hold Structured Products," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 16(4), pages 297-310, October.
    • Handle: RePEc:taf:hbhfxx:v:16:y:2015:i:4:p:297-310
    DOI: 10.1080/15427560.2015.1095750
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    Cited by:

    1. Matthias Pelster & Andrea Schertler, 2019. "Pricing and issuance dependencies in structured financial product portfolios," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 342-365, March.
    2. Hilmar Gudmundsson & David Vyncke, 2021. "A Generalized Weighted Monte Carlo Calibration Method for Derivative Pricing," Mathematics, MDPI, vol. 9(7), pages 1-22, March.
    3. Lunn, Pete & McGowan, Féidhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78, June.

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