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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 28 results

Structured Products and the Mischief of Self-Indexing

By: Geng Deng, Craig McCann and Mike Yan

In recent years, investment banks have issued structured products linked to indexes they create rather than just linking to standardized indexes from Standard & Poor's. In doing so, the issuers create additional difficulties for retail investors to understand these, sometimes complex, investments. We illustrate the potential conflicts of interest created with structured products linked to proprietary volatility indexes although the conflicts are present in other proprietary index based...

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,...

Efficient Valuation of Equity-Indexed Annuities Under Lévy Processes Using Fourier-Cosine Series

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

Equity-Indexed Annuities (EIAs) are deferred annuities which accumulate value over time according to crediting formulas and realized equity index returns. We propose an efficient algorithm to value two popular crediting formulas found in EIAs - Annual Point-to-Point (APP) and Monthly Point-to-Point (MPP) - under general Lévy-process based index returns. APP contracts observe returns of referenced indexes annually and credit EIA accounts, subject to minimum and maximum returns. MPP contracts...

The Fall of Willow

By: Geng Deng and Craig McCann

From May 8, 2000 until June 30, 2007, the UBS Willow Fund was invested in distressed obligations with offsetting but smaller cash and synthetic short debt positions through credit default swaps (CDS). After June 2007 the Fund dramatically increased its purchases of CDS and became massively short distressed debt. Investors in the Fund lost $278.4 million during this second period from June 2007 to December 2012 and the Willow Fund was liquidated in 2013.

The Willow Fund understated the risk...

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...

Crooked Volatility Smiles: Evidence from Leveraged and Inverse ETF Options

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

We find that leverage in exchange traded funds (ETFs) can affect the "crookedness" of volatility smiles. This observation is consistent with the intuition that return shocks are inversely correlated with volatility shocks - resulting in more expensive out-of-the-money put options and less expensive out-of-the-money call options. We show that the prices of options on leveraged and inverse ETFs can be used to better calibrate models of stochastic volatility. In particular, we study a...

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...

Modeling a Risk-Based Criterion for a Portfolio with Options

By: Geng Deng, Tim Dulaney, and Craig McCann

The presence of options in a portfolio fundamentally alters the portfolio's risk and return profiles when compared to an all equity portfolio. In this paper, we advocate modeling a risk-based criterion for optioned portfolio selection and rebalancing problems. The criterion is inspired by Chicago Mercantile Exchange's risk-based margining system which sets the collateralization requirements on margin accounts. The margin criterion computes the losses expected at the portfolio level using...

Robust Portfolio Optimization with VaR Adjusted Sharpe Ratio

By: Geng Deng, Tim Dulaney, Craig McCann, and Olivia Wang

We propose a robust portfolio optimization approach based on Value-at-Risk (VaR) adjusted Sharpe ratios. Traditional Sharpe ratio estimates using a limited series of historical returns are subject to estimation errors. Portfolio optimization based on traditional Sharpe ratios ignores this uncertainty and, as a result, is not robust. In this paper, we propose a robust portfolio optimization model that selects the portfolio with the largest worse-case-scenario Sharpe ratio within a given...

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...

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