Implied Risk Aversion: An Alternative Rating System for Retail Structured Products
28 Pages Posted: 28 Aug 2015 Last revised: 14 Dec 2018
Date Written: December 21, 2018
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
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