Investors’ Risk Perceptions of Structured Financial Products with Worst-of Payout Characteristics

Kunz, Alexis H.; Messner, Claude; Wallmeier, Martin (2017). Investors’ Risk Perceptions of Structured Financial Products with Worst-of Payout Characteristics. Journal of behavioral and experimental finance, 15(15), pp. 66-73. Elsevier 10.1016/j.jbef.2017.07.005

Text 1-s2.0-S2214635017300473-main.pdf - Published Version Restricted to registered users only Available under License Publisher holds Copyright. Download (578kB)

We conduct an experiment to investigate how investors assess the risk of Reverse Convertibles that link the payout to the worst performing stock of a pool of underlying assets. Based on theory from psychology, we conjecture that investors’ risk perception can be systematically biased downwards via the strategic selection and composition of the underlying assets. We predict and find that adding relatively safe assets to a risky underlying asset decreases perceived investment risk despite the fact that the risk always strictly increases. Investment experience and expertise alleviate but do not eliminate the bias. Our findings contribute to the understanding of the puz-zling success of structured products with worst-of payout characteristics. They also come with important implications for investor protection in a market in which financial institutions can tailor financial products to exploit behavioral biases of non-professional investors.

Interest & Impact

Downloads

1 since deposited on 08 Nov 2017
0 in the past 12 months

Citations

5 Citations in Web of Science ®
6 Citations in Scopus

Search

in Google Scholar™

Services

Actions (login required)

Edit item

Actions (login required)

Edit item