Investment Analysis of Autocallable Contingent Income Securities

52 Pages Posted: 21 Mar 2014 Last revised: 6 Aug 2015

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Raquel M. Gaspar

ISEG and Cemapre, Universidade de Lisboa

Allen Michel

Boston University School of Management

Date Written: May 1, 2015

Abstract

Autocallable contingent income securities, or autocalls, are a relatively new type of structured finance security whose payout is contingent on the performance of an underlying asset and that give investors an opportunity to earn high yields in a low interest environment. We collect data on autocalls issued in the US and describe their contractual properties and the properties of their underlying assets at issuance. We find that autocalls are issued on underlying assets displaying high volatility, negative skewness and high prices. We then model a typical autocall under different assumptions about the price of the underlying asset and (i) analyze the rationale behind the characteristics of the underlying asset at issuance, and (ii) discuss valuation of autocalls in the various models. While the literature consistently finds that structured products are overpriced, we find that incorporating stochastic volatility into the pricing model can help explain some of the overpricing routinely reported in prior studies.

Suggested Citation

Albuquerque, Rui A. and Gaspar, Raquel M. and Michel, Allen, Investment Analysis of Autocallable Contingent Income Securities (May 1, 2015). Financial Analysts Journal, Vol. 71, pp. 61–83, May/June 2015.. Available at SSRN: https://ssrn.com/abstract=2411789 or http://dx.doi.org/10.2139/ssrn.2411789

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Raquel M. Gaspar

ISEG and Cemapre, Universidade de Lisboa ( email )

Rua Miguel Lupi, 20
room 510
Lisbon, 1249-078
Portugal

Allen Michel

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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