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

Research output: Contribution to journalArticle

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Discount or premium? Pricing of structured products: an analysis of Chinese market. / Chen, Rongda; Zhou, Hanxian; Jin, Chenglu; Liu, Jia.

In: International Review of Financial Analysis, Vol. 70, 101493, 01.07.2020.

Research output: Contribution to journalArticle

Harvard

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, vol. 70, 101493. https://doi.org/10.1016/j.irfa.2020.101493

APA

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

Vancouver

Chen R, Zhou H, Jin C, Liu J. Discount or premium? Pricing of structured products: an analysis of Chinese market. International Review of Financial Analysis. 2020 Jul 1;70. 101493. https://doi.org/10.1016/j.irfa.2020.101493

Author

Chen, Rongda ; Zhou, Hanxian ; Jin, Chenglu ; Liu, Jia. / Discount or premium? Pricing of structured products: an analysis of Chinese market. In: International Review of Financial Analysis. 2020 ; Vol. 70.

Bibtex

@article{0b6203e646144fdabbafc21366c272c5,
title = "Discount or premium? Pricing of structured products: an analysis of Chinese market",
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.",
keywords = "Structured products, Internet financial environment, Pricing mechanism, Chinese market, Incorporate option structures, embargoover12",
author = "Rongda Chen and Hanxian Zhou and Chenglu Jin and Jia Liu",
year = "2020",
month = jul,
day = "1",
doi = "10.1016/j.irfa.2020.101493",
language = "English",
volume = "70",
journal = "International Review of Financial Analysis",
issn = "1057-5219",
publisher = "Elsevier Inc.",

}

RIS

TY - JOUR

T1 - Discount or premium? Pricing of structured products: an analysis of Chinese market

AU - Chen, Rongda

AU - Zhou, Hanxian

AU - Jin, Chenglu

AU - Liu, Jia

PY - 2020/7/1

Y1 - 2020/7/1

N2 - 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.

AB - 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.

KW - Structured products

KW - Internet financial environment

KW - Pricing mechanism

KW - Chinese market

KW - Incorporate option structures

KW - embargoover12

UR - https://linkinghub.elsevier.com/retrieve/pii/S105752192030137X

U2 - 10.1016/j.irfa.2020.101493

DO - 10.1016/j.irfa.2020.101493

M3 - Article

VL - 70

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

M1 - 101493

ER -

ID: 22979158