The Risk-Return Relationship for Structured Products and Risk Free Bonds: is the direct link really correct?

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

The paper analyses structured bonds from a new perspective: the ex-post return of structured products is compared to the return of risk free bonds in order to test if the paradigm "the riskier the product the greater the expected return" holds. This question is relevant since in Italy structured bonds are issued by banks and sold out to retail customers with huge implicit premiums with respect to their fair value. The work is based on a unique data set based both on information provided by Borsa Italiana (Italian Stock Exchange) and from each single prospectus. The study reveals a striking advantage of risk free bonds over structured products: although the latter carry a higher level of risk they show lower returns. This work offers another contribute to current literature: it provides a classification of the products issued by Italian banks on the basis of the derivative instrument embedded in the bond. The Italian market is characterized by a huge fragmentation; each issue has its own underlying and its own indexation rule, the nominal value is often very low and the secondary market suers from a lack of liquidity. As a consequence structured bonds do not seem suitable for retail investors that are not able to understand the real risk-return prole of the instrument.
Original languageEnglish
Title of host publicationIFABS 2011
Pages1-20
Number of pages20
Publication statusPublished - 2011
EventIFABS 2011 CONFERENCE - Roma
Duration: 30 Jun 20112 Jul 2011

Conference

ConferenceIFABS 2011 CONFERENCE
CityRoma
Period30/6/112/7/11

Keywords

  • linked bond
  • reverse floater

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