The Optimal Demand for Retail Derivatives

36 Pages Posted: 6 Mar 2008

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Beate Breuer

Goethe University Frankfurt - Graduate Program "Finance and Monetary Economics"

Date Written: March 3, 2008

Abstract

It has been shown that investors can benefit from including derivatives into their portfolios. For retail investors, however, a direct investment in derivatives is often too complicated. Investment certificates offer a potential solution to this problem. We analyze if retail investors who buy and hold their portfolio for one year can indeed benefit from an investment in these certificates. We use a model with stochastic volatility and jumps calibrated to the German stock market index DAX. We find that the benefit of investing in typical retail products is equivalent to an annualized risk-free excess return of at most 35 basis points for a CRRA investor with a low risk aversion. If we take transaction costs into account, this number reduces to at most 14~bp. In terms of the types of contracts, we find that discount certificates perform best, while more sophisticated certificates, in particular those with knock-in or knock-out features, should often not be held by investors at all. Therefore, standard preferences cannot explain the large observed demand for investment certificates.

Keywords: Asset Allocation, Risk Premia, Structured Products, Discrete Trading, Calibration of Jump-Diffusion Models

JEL Classification: G11

Suggested Citation

Branger, Nicole and Breuer, Beate, The Optimal Demand for Retail Derivatives (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=1101399 or http://dx.doi.org/10.2139/ssrn.1101399

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Beate Breuer (Contact Author)

Goethe University Frankfurt - Graduate Program "Finance and Monetary Economics" ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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