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Interest rate structured products: can they improve the risk–return profile?

Fusai, G. ORCID: 0000-0001-9215-2586, Longo, G. and Zanotti, G. (2021). Interest rate structured products: can they improve the risk–return profile?. The European Journal of Finance, doi: 10.1080/1351847x.2021.1967180

Abstract

In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to a multifactor no-arbitrage interest rate model and comparing the performance of a portfolio consisting of basic products (zero-coupon bonds, coupon bonds and floating rate notes) with a portfolio containing more sophisticated exotic products (like constant maturity swaps, collars, spread and volatility notes). Our analysis, performed under different market environments, as well as volatility and correlation levels, takes into account the combined effects of risk premiums required by investors and fees that they have to pay. Our results show that capital protected interest rate structured products allow investors to improve risk–return trade-off if no fees are considered. With fees, our simulations show that structured products add value to the basic portfolio in a very limited number of cases. We believe our paper contributes to understanding the role of structured products in investors portfolios also in light of the current regulatory debate on the use of complex financial products by retail investors.

Publication Type: Article
Additional Information: This is an Accepted Manuscript version of the following article, accepted for publication in European Journal of Finance. Fusai, G. , Longo, G. and Zanotti, G. (2021). Interest rate structured products: can they improve the risk–return profile?. The European Journal of Finance, doi: 10.1080/1351847x.2021.1967180 is deposited under the terms of the Creative Commons Attribution-NonCommercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords: Structured products, efficient frontier, portfolio diversification, interest rate derivatives, term structure model
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 27 Sep 2021 09:34
Date deposited: 27 September 2021
Date of acceptance: 21 July 2021
Date of first online publication: 23 September 2021
URI: https://openaccess.city.ac.uk/id/eprint/26803
[img] Text - Accepted Version
This document is not freely accessible until 23 March 2023 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial.

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