Download this Paper Open PDF in Browser

Patterns in the Payoffs of Structured Equity Derivatives

51 Pages Posted: 20 Mar 2007 Last revised: 13 Dec 2007

Brian J. Henderson

George Washington University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: October 2007

Abstract

Structured equity products (SEP's) are medium-term notes with payoffs based on the prices of common stocks, baskets of stocks, or stock indices. This paper documents striking patterns in the payoff profiles of SEPs. Products based on the prices of individual equities predominantly have concave payoff profiles, while those based on equity indices predominantly have convex payoffs. Given SEP markups, it seems unlikely that these patterns can be explained by any plausible normative model of the behavior of rational investors. Thus, the payoff patterns suggest the existence of different cognitive or other behavioral biases, depending upon the underlying asset.

Keywords: Structured Products, Behavioral Finance, Derivative Pricing

Suggested Citation

Henderson, Brian J. and Pearson, Neil D., Patterns in the Payoffs of Structured Equity Derivatives (October 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972570 or http://dx.doi.org/10.2139/ssrn.972570

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Neil D. Pearson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Paper statistics

Downloads
1,371
Rank
10,700
Abstract Views
4,750