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http://ssrn.com/abstract=972570
 
 

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Patterns in the Payoffs of Structured Equity Derivatives


Brian J. Henderson


George Washington University - Department of Finance

Neil D. Pearson


University of Illinois at Urbana-Champaign - Department of Finance

October 2007

AFA 2008 New Orleans Meetings Paper

Abstract:     
Structured equity products (SEP's) are medium-term notes with payoffs based on the prices of common stocks, baskets of stocks, or stock indices. This paper documents striking patterns in the payoff profiles of SEPs. Products based on the prices of individual equities predominantly have concave payoff profiles, while those based on equity indices predominantly have convex payoffs. Given SEP markups, it seems unlikely that these patterns can be explained by any plausible normative model of the behavior of rational investors. Thus, the payoff patterns suggest the existence of different cognitive or other behavioral biases, depending upon the underlying asset.

Number of Pages in PDF File: 51

Keywords: Structured Products, Behavioral Finance, Derivative Pricing

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Date posted: March 20, 2007 ; Last revised: December 13, 2007

Suggested Citation

Henderson, Brian J. and Pearson, Neil D., Patterns in the Payoffs of Structured Equity Derivatives (October 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=972570 or http://dx.doi.org/10.2139/ssrn.972570

Contact Information

Brian Joseph Henderson
George Washington University - Department of Finance ( email )
Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)
Neil D. Pearson (Contact Author)
University of Illinois at Urbana-Champaign - Department of Finance ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)
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