Demand of structured products in a prospect utility framework Utility increase from capital protected index linked products

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi Mithiku, Elias 2011-11-14T11:24:11Z 2011-11-14T11:24:11Z 2011
dc.description.abstract PURPOSE OF THE STUDY This study examines the behavioral factors driving the demand for structured products (SP) and the utility implications for investors using these products, assuming that preference are defined by Kahneman and Tversky’s prospect utility framework. Based on this framework I will test how the utility of an economic agent is affected by adding SPs in to his portfolio. This thesis has two main research questions; should there exist a demand for SPs and whether consumers are better off using these products. A simple capital protected stock index linked note, the most common product category in Finland, is tested against an optimal two fund portfolio to determine the potential utility gain. I will also interview several professional engaged in the design and marketing of SPs to see whether the theoretical findings of my tests fit with the real world experience of the professionals. DATA AND METHODOLOGY To test for the utility implications of SPs I will simulate the expected return distribution of a capital protected SP and an optimal two fund portfolio using the monthly returns on the MSCI World index and US treasury bonds from 1970-2011. Due to the potential for non-representativeness I will also vary these distributions to make sure that the same conclusions would hold with other datasets. To define revealed preferences I will use utility function parameters defined by Tversky and Kahneman (1992). The implications of expected utility being the true form of normative preference will also be tested using consumption based CAPM, with parameters defined by Mehra and Prescott (1985) and Mankiw & Zeldes’ (1991). I will also analyze the impact of different factors of the prospect utility framework by changing the function parameters to understand the precise factors driving the demand of SPs. RESULTS The results show that, in a prospect utility framework, there is a clear addition in utility in certainty equivalent return terms. This addition even after costs is large enough to explain the demand towards SPs. This utility addition is mainly driven by a combination of loss aversion and the use of subjective probabilities, which are both components of the prospect utility framework. On the other hand Expected utility and prospect utility with true probabilities is only slightly increased compared to an optimal two-fund portfolio, this increase is not enough to outweigh the structuring costs of SPs. This leads us to believe that these products can have a utility decreasing effect for economic agents with low cost optimal portfolios as the alternative investment asset. en
dc.format.mimetype application/pdf en
dc.language.iso en en
dc.title Demand of structured products in a prospect utility framework Utility increase from capital protected index linked products en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Economics en
dc.contributor.department Department of Finance en
dc.contributor.department Rahoituksen laitos fi
dc.subject.keyword Structured products
dc.subject.keyword prospect theory
dc.subject.keyword cumulative prospect theory
dc.subject.keyword behavioral finance
dc.subject.keyword optimal portfolio
dc.identifier.urn URN:NBN:fi:aalto-201111181684
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon behavioral finance
dc.subject.helecon behavioral finance
dc.ethesisid 12640 2011-10-06
dc.location P1 I

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