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Asian Review of Financial Research, Vol., No..
pp.206~238
pp.206~238
Analysis of Excess Premium in Complex Structured Products
Young-Min Choi Department of Economics, Seoul National University.
Won-Suk Liu Department of Economics, Seoul National University.
Young-Sik Kim Department of Economics, Seoul National University.
The literature on retail structured products reports significant over-valuation and large premia. There are two prevailing views on such premia. First, large premia are induced by product complexity, which inhibits investors from overcoming knowledge asymmetry. Second, high premia are induced by hedging difficulty, which leads the issuer to charge higher hedging costs. Thus, product which has more complexity is expected higher premium. The present study sets forth more rigorous evidences with respect to asset dimensions and asset types. We find two empirical findings, using reverse convertibles (RCs) and two-asset reverse convertibles (TARCs) product data. First, more complex products which has more underlying assets, are faced with higher knowledge asymmetry as well as hedging costs, results higher premium. Second, when asset information or hedging instruments are less accessible, difficulties of gauging products fairness as well as hedging increase, and result also higher premium. Therefore, when complexities are overlapped in respect of types and dimensions, the most high premium can be explained.
Young-Min Choi
Won-Suk Liu
Young-Sik Kim
The literature on retail structured products reports significant over-valuation and large premia. There are two prevailing views on such premia. First, large premia are induced by product complexity, which inhibits investors from overcoming knowledge asymmetry. Second, high premia are induced by hedging difficulty, which leads the issuer to charge higher hedging costs. Thus, product which has more complexity is expected higher premium. The present study sets forth more rigorous evidences with respect to asset dimensions and asset types. We find two empirical findings, using reverse convertibles (RCs) and two-asset reverse convertibles (TARCs) product data. First, more complex products which has more underlying assets, are faced with higher knowledge asymmetry as well as hedging costs, results higher premium. Second, when asset information or hedging instruments are less accessible, difficulties of gauging products fairness as well as hedging increase, and result also higher premium. Therefore, when complexities are overlapped in respect of types and dimensions, the most high premium can be explained.
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