Do Structured Products Improve Portfolio Performance? A Backtesting Exercise

Florian Perusset and Michael Rockinger
Additional contact information
Florian Perusset: École Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Michael Rockinger: University of Lausanne; and Swiss Finance Institute

No 23-47, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We consider a laboratory where bootstrapped synthetic structured products (convertible bonds, reverse convertibles, or barrier reverse convertibles) are added to a 60\% stock and 40\% bond portfolio. By using market data on the underlying assets which are stocks and bonds we directly inherit a realistic dynamic. We show that including structured products in the 60/40 portfolio results in a lower return and lower risk-adjusted performances regardless of what type of structured product is considered. Adding structured products to a portfolio impacts the distributional properties, rendering the distribution less Gaussian. By computing the opportunity costs of including structured products in the 60/40 portfolio, based on a Taylor approximation around the expected utility, we demonstrate that the opportunity cost is negative for all structured products and for reasonable levels of risk-aversion. This finding implies disutility for investors who choose to include structured products in their portfolio. For more complicated opaque structured products without explicit close-form solutions but with stale prices and transaction costs, we expect further performance deterioration.

Keywords: Structured product portfolio performance; convertible bonds; reverse convertible; barrier reverse convertible (search for similar items in EconPapers)
Pages: 42 pages
Date: 2023-06
New Economics Papers: this item is included in nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4418627 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2347

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal (rps@sfi.ch).