Capital Protected Notes for Loss Averse Investors: A Counterintuitive Result

Patrick ROGER

Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) from Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg (France)

Abstract: Capital protected notes are very popular structured products since the internet bubble burst in 2000. Investors are protected against large losses they could suffer if they were investing directly in the underlying index or portfolio of stocks. It then seems intuitive that such products are attractive for loss averse investors. However, using a simple version of cumulative prospect theory, we show that these products are not attractive when the investor takes either the underlying index or the risk-free investment as the reference point. She always prefer an investment in the index or in the risk-free portfolio, depending on her coefficient of loss aversion.

Keywords: Structured finance; prospect theory; loss aversion; capital protection. (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:lar:wpaper:2008-16

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