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Research Papers

Our experts have published extensively in peer-reviewed journals. Pre-publication versions of these papers plus other working papers are available below.

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Displaying 10 out of 12 results

Ex-post Structured Product Returns: Index Methodology and Analysis

By: Geng Deng, Tim Dulaney, Tim Husson, Craig McCann, and Mike Yan

The academic and practitioner literature now includes numerous studies of the substantial issue date mispricing of structured products but there is no large scale study of the ex-post returns earned by structured product investors. This paper augments the current literature by analyzing the ex-post returns of nearly 18,000 individual structured products issued by 13 brokerage firms since 2007. We construct our structured product index and sub-indices for reverse convertibles,...

Valuation of Structured Products

By: Geng Deng, Tim Husson, and Craig McCann

The market for structured products has grown dramatically in the past decade. Their diversity and complexity has led to the development of many different valuation approaches, and which approach to use to value a given product is not always clear. In this paper we demonstrate and discuss four approaches to valuing structured products: simulation of the linked financial instrument's future values, numerical integration, decomposition, and partial differential equation approaches. As an...

Valuation of Reverse Convertibles in the VG Economy

By: Geng Deng, Tim Dulaney, and Craig McCann

Prior research on structured products has demonstrated that equity-linked notes sold to retail investors in initial public offerings are typically issued at above their fair market value. A particular type of equity-linked note reverse convertibles embed down-and-in put options and other investors relatively high coupon payments in exchange for bearing some of the downside risk of the equity underlying the note. We analytically study the magnitude of the overpricing of reverse...

Structured Product Based Variable Annuities

By: Geng Deng, Tim Dulaney, Tim Husson, and Craig McCann

Recently, a new type of variable annuity has been marketed to investors which is based on structured product-like investments instead of the mutual fund-like investments found in traditional variable annuities. Embedding a structured product into a variable annuity introduces substantial complexity into an investment typically considered conservative. In this paper, we describe structured product based variable annuity (spVA) crediting formulas and how they differ from traditional VAs, value...

The Rise and Fall of Apple-linked Structured Products

By: Geng Deng, Tim Dulaney, Craig McCann, and Mike Yan

The rise in Apple's market capitalization in 2012 coincided with a dramatic increase in single-observation reverse convertibles, reverse convertibles and autocallable notes linked to Apple's stock price. These notes all transfer the downside risk of owning Apple to investors but cap the upside at somewhat more than corporate bond yields. Issuers use individual stocks like Apple as the reference obligations for reverse convertible structured products because investors underestimate the risk...

Dual Directional Structured Products

By: Geng Deng, Tim Dulaney, Tim Husson, and Craig McCann

We analyze and value dual directional structured products - or simply dual directionals (DDs) - which have been issued in large amounts since the beginning of 2012. DD's evolved out of another type of structured product called absolute return barrier notes (ARBNs); however, DD's lack principal protection and have different embedded options positions, which have yet to be described in the literature. We find that DDs can be broadly organized into two categories: single observation dual...

Modeling Autocallable Structured Products

By: Geng Deng, Joshua Mallett, and Craig McCann

Since first introduced in 2003, the number of autocallable structured products in the U.S. has increased exponentially. The autocall feature immediately converts the product if the reference asset's value rises above a pre-specified call price. Because an autocallable structured product matures immediately if it is called, the autocall feature reduces the product's duration and expected maturity.

In this paper, we present a flexible Partial Differential Equation (PDE) framework to model...

The Anatomy of Principal Protected Absolute Return Notes

By: Geng Deng, Ilan Guedj, Joshua Mallett, and Craig McCann

Principal Protected Absolute Return Barrier Notes (ARBNs) are structured products that guarantee to return the face value of the note at maturity and pay interest if the underlying security's price does not vary excessively.

The SLCG study derives four closed-form valuation approaches which are considered as representative methodologies on valuing structured products. The approaches are: 1) decomposing an ARBN's payoff into double-barrier linear segment options, 2) decomposing an ARBN's...

What TiVo and JP Morgan teach us about Reverse Convertibles

By: Geng Deng, Craig McCann, and Edward O'Neal

Reverse convertibles are short term, unsecured notes issued by brokerage firms including JP Morgan, Barclays, Citigroup, Morgan Stanley, Wachovia, Lehman Brothers, and RBC that pay less than the notes' face value at maturity if the price of the reference stock or the level of the reference stock index declines substantially during the term of the note. The SLCG study finds that brokerage firms overcharge for reverse convertibles so significantly that the expected return on these complex...

Structured Products in the Aftermath of Lehman Brothers

By: Geng Deng, Guohua Li, and Craig McCann

SLCG's prior research showed that structured products were poor investments because they were significantly overpriced when offered and were, at best, thinly traded thereafter. SLCG concluded that overpriced structured products survived in the marketplace because structured products' opaqueness obscured their true risks and costs and the high fees earned by underwriters and salespersons.

The current SLCG study presents a brief history of the structured products program at Lehman Brothers...

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