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Retail banking and behavioral financial engineering: The case of structured products
Authors:Wolfgang Breuer  Achim Perst
Affiliation:RWTH Aachen University, Department of Finance, Templergraben 64, 52056 Aachen, Germany
Abstract:We apply cumulative prospect theory and hedonic framing to evaluate discount reverse convertibles (DRCs) and reverse convertible bonds (RCBs) as important examples of structured products from a boundedly rational investor’s point of view. While common expected utility theory would also conclude that DRCs and RCBs are of interest to investors with moderate return expectations and underestimated stock return volatility, that theory would overestimate the market success of DRCs and underestimate that of RCBs in comparison to a situation with bounded rationality. Hedonic framing and relatively low subjectively felt competence levels of investors are decisive for the demand for RCBs.
Keywords:G31   G32   G35
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