52 Pages Posted: 21 Mar 2014 Last revised: 6 Aug 2015
Date Written: May 1, 2015
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: 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