Implied Risk Aversion: An Alternative Rating System for Retail Structured Products

28 Pages Posted: 28 Aug 2015 Last revised: 14 Dec 2018

See all articles by Holger Fink

Holger Fink

Nuertingen-Geislingen University of Applied Sciences

Sebastian Geissel

University of Applied Sciences Brandenburg

Jörn Sass

University of Kaiserslautern - Department of Mathematics

Frank Thomas Seifried

University of Trier

Date Written: December 21, 2018

Abstract

This article proposes implied risk aversion as a rating methodology for retail structured products. Implied risk aversion is based on optimal expected utility risk measures (OEU) as introduced by Geissel et al. (2017) and, in contrast to standard V@R-based ratings, takes into account both the upside potential and the downside risks of such products. In addition, implied risk aversion is easily interpreted in terms of an individual investor's risk aversion: A product is attractive for an investor if his individual relative risk aversion is smaller than the product's implied risk aversion. We illustrate our approach in a case study with more than 15,000 short-term warrants on DAX that highlights some differences between our rating system and the traditional V@R-based approach.

Keywords: structured products, risk measures, optimal expected utility, implied risk aversion

JEL Classification: G11, D81

Suggested Citation

Fink, Holger and Geissel, Sebastian and Sass, Jörn and Seifried, Frank Thomas, Implied Risk Aversion: An Alternative Rating System for Retail Structured Products (December 21, 2018). Available at SSRN: https://ssrn.com/abstract=2651135 or http://dx.doi.org/10.2139/ssrn.2651135

Holger Fink

Nuertingen-Geislingen University of Applied Sciences ( email )

Sigmaringer Strasse 25
Nuertingen, 72622
Germany

Sebastian Geissel (Contact Author)

University of Applied Sciences Brandenburg ( email )

Brandenburg/Havel, 14770
Germany

Jörn Sass

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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