Discount or premium? Pricing of structured products : an analysis of Chinese market

Chen, R; Zhou, H; Jin, C; Liu, JL

Abstract

Structured products combine elementary instruments from the spot and derivative markets. The existing evidence on mature markets shows that structured products are commonly charged with large implicit premiums compared to their theoretical values. However, this paper finds that structured products in Chinese market are, on average, priced closely to their theoretical values, which no longer favors the issuing institution. This is reasonable as the issuing banks' market power in China is relatively low compared to those in mature markets, given three characteristics in Chinese market (the intense competition from Internet finance, strict short-sell constraints, and the lack of secondary market as well as redeemable claims). Specifically, based on a database including 126 structured products with various underlying assets and durations from two main structured products issuing banks in China, this paper finds two more interesting results. First, structured products with call option and double option components are generally issued at a small discount, while most structured products with put options components are issued at a small premium. Second, a significantly negative correlation is also found between implicit premium and duration, indicating that the implicit premium rates of short-term products are higher than those of long-term products. Overall, these findings suggest that issuing banks' market power is weakened by the competitive market and incomplete market structure.

Citation

Chen, R., Zhou, H., Jin, C., & Liu, J. (2020). Discount or premium? Pricing of structured products : an analysis of Chinese market. International Review of Financial Analysis, 70, 101493. https://doi.org/10.1016/j.irfa.2020.101493

• Journal Article Type: Article
• Acceptance Date: Mar 26, 2020
• Online Publication Date: May 4, 2020
• Publication Date: Jul 1, 2020
• Deposit Date: Jun 29, 2020
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Volume: 70
• Pages: 101493
• DOI: https://doi.org/10.1016/j.irfa.2020.101493
• Publisher URL: https://doi.org/10.1016/j.irfa.2020.101493
• Related Public URLs: http://www.journals.elsevier.com/international-review-of-financial-analysis/
• Additional Information: Additional Information : ** Article version: AM ** Embargo end date: 31-12-9999 ** From Elsevier via Jisc Publications Router ** Licence for AM version of this article: This article is under embargo with an end date yet to be finalised. **Journal IDs: issn 10575219 **History: issue date 04-05-2020; accepted 26-03-2020; Funders : National Natural Science Foundation of China;Zhejiang Provincial Natural Science Foundation; Projects : 71631005;71471161;LQ20G030019