A Quantitative Risk-Based Approach to the Transparency on Non-Equity Investment Products

Quaderni di Finanza, CONSOB, 2009

66 Pages Posted: 11 Jul 2011

See all articles by Marcello Minenna

Marcello Minenna

The Italian Securities and Exchange Commission (CONSOB)

Giovanna Maria Boi

The Italian Securities and Exchange Commission

Adele Oliva

CONSOB (Commissione Nazionale per le Società e la Borsa)

Antonio Russo

The Italian Securities and Exchange Commission (CONSOB)

Paolo Verzella

The Italian Securities and Exchange Commission (CONSOB)

Date Written: May 4, 2009

Abstract

The purpose of the transparency on the risk profile of non-equity investment products is to allow investors to take informed investment decisions. In an international framework characterized by an increasing globalization of markets and a growing integration of banking, asset management and insurance activities, the traditional use of narrative descriptions of the various risks is no longer effective. On the contrary, it would be better to use synthetic indicators which are immediately comprehensible to investors and defined in relation to robust and objective quantitative metrics. The result is a risk-based approach to transparency built on three pillars: the recommended investment time horizon, that is the investment horizon which is compatible with the investor's liquidity preferences, the potential returns that the non-equity investment product can offer to the investor, and the degree of risk associated with that product.

The information obtained from these three pillars allows to determine the essential elements of the financial investment, both for the purposes of the disclosure to be provided in offering prospectuses, and for the suitability tests performed by distributors.

To ensure a concrete implementation of the risk-based approach to transparency, the current fragmentation of the EU regulatory framework should be overcome through the issuing of a single directive on the transparency of non-equity investment products able to concretely realize the levelling the playing field principle. In this perspective, the Italian law-maker could intervene to align the transparency requirements of class I policies to those of the financial-insurance products already under the Consob supervision.

Keywords: Transparency, risk, return, investment time horizon, unbundling, risk-free asset, benchmark, prospectus, product information sheet, volatility, GARCH, probability scenarios, key information document, first passage times, pricing, fair value, mark-up, mispricing, risk-neutral measure, migration

JEL Classification: C02, C32, C51, C61, G11, G17, G20, G32, G38, K23

Suggested Citation

Minenna, Marcello and Boi, Giovanna Maria and Oliva, Adele and Russo, Antonio and Verzella, Paolo, A Quantitative Risk-Based Approach to the Transparency on Non-Equity Investment Products (May 4, 2009). Quaderni di Finanza, CONSOB, 2009. Available at SSRN: https://ssrn.com/abstract=1883389 or http://dx.doi.org/10.2139/ssrn.1883389

Marcello Minenna

The Italian Securities and Exchange Commission (CONSOB) ( email )

Via G.B.Martini 3
Rome
Italy

Giovanna Maria Boi (Contact Author)

The Italian Securities and Exchange Commission ( email )

Rome, 00198
Italy

Adele Oliva

CONSOB (Commissione Nazionale per le Società e la Borsa) ( email )

Roma 00198
Italy

Antonio Russo

The Italian Securities and Exchange Commission (CONSOB) ( email )

United States

Paolo Verzella

The Italian Securities and Exchange Commission (CONSOB) ( email )

United States

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