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

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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.
Original languageEnglish
Article number101493
Number of pages9
JournalInternational Review of Financial Analysis
Early online date4 May 2020
Publication statusPublished - 1 Jul 2020


  • LIU_2020_cright_Discount or Premium - Pricing of Structured Products

    Accepted author manuscript (Post-print), 2.3 MB, PDF document

    Due to publisher’s copyright restrictions, this document is not freely available to download from this website until: 4/11/21

    Licence: CC BY-NC-ND

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