IDEAS home Printed from https://ideas.repec.org/a/kap/revdev/v21y2018i2d10.1007_s11147-017-9138-2.html
   My bibliography  Save this article

The volatility target effect in structured investment products with capital protection

Author

Listed:
  • Sergio Albeverio

    (Universitaet Bonn
    HCM
    SFB 611
    BiBoS)

  • Victoria Steblovskaya

    (Bentley University)

  • Kai Wallbaum

    (Allianz Global Investors GmbH)

Abstract

Designing a structured investment product with capital protection which would be characterized by high capital protection level as well as high equity participation rate is a challenging task in the current market environment. Low interest rates and high volatility levels negatively affect the above key parameters of such investment products. One way to increase the participation rate of a structured investment product with a fixed capital protection level is to use a volatility target (VolTarget) strategy as an underlying asset for a financial option embedded in such a product. We introduce an extended VolTarget mechanism with interest rate dependent volatility target levels and provide a detailed comparative numerical study of European options linked to VolTarget strategies within a hybrid Heston–Vasičec model with stochastic volatility and stochastic interest rate.

Suggested Citation

  • Sergio Albeverio & Victoria Steblovskaya & Kai Wallbaum, 2018. "The volatility target effect in structured investment products with capital protection," Review of Derivatives Research, Springer, vol. 21(2), pages 201-229, July.
    • Handle: RePEc:kap:revdev:v:21:y:2018:i:2:d:10.1007_s11147-017-9138-2
    DOI: 10.1007/s11147-017-9138-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11147-017-9138-2
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11147-017-9138-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Victoria Steblovskaya & Sergio Albeverio, 2002. "A model of financial market with several interacting assets. Complete market case," Finance and Stochastics, Springer, vol. 6(3), pages 383-396.
    2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    3. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    4. S. Albeverio & V. Steblovskaya & K. Wallbaum, 2013. "Investment instruments with volatility target mechanism," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1519-1528, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luca Di Persio & Matteo Garbelli & Kai Wallbaum, 2021. "Forward-Looking Volatility Estimation for Risk-Managed Investment Strategies during the COVID-19 Crisis," Risks, MDPI, vol. 9(2), pages 1-16, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luca Di Persio & Luca Prezioso & Kai Wallbaum, 2019. "Closed-End Formula for options linked to Target Volatility Strategies," Papers 1902.08821, arXiv.org.
    2. Nicole Branger & An Chen & Antje Mahayni & Thai Nguyen, 2023. "Optimal collective investment: an analysis of individual welfare," Mathematics and Financial Economics, Springer, volume 17, number 5, December.
    3. Giuseppe Orlando & Michele Bufalo, 2021. "Interest rates forecasting: Between Hull and White and the CIR#—How to make a single‐factor model work," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(8), pages 1566-1580, December.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    6. J. Lars Kirkby & Duy Nguyen, 2020. "Efficient Asian option pricing under regime switching jump diffusions and stochastic volatility models," Annals of Finance, Springer, vol. 16(3), pages 307-351, September.
    7. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    8. Cheikh Mbaye & Frédéric Vrins, 2022. "Affine term structure models: A time‐change approach with perfect fit to market curves," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 678-724, April.
    9. Roman Horsky & Tilman Sayer, 2015. "Joining The Heston And A Three-Factor Short Rate Model: A Closed-Form Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(08), pages 1-17, December.
    10. Cai, Lili & Swanson, Norman R., 2011. "In- and out-of-sample specification analysis of spot rate models: Further evidence for the period 1982-2008," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 743-764, September.
    11. Alexander Lipton, 2024. "Hydrodynamics of Markets:Hidden Links Between Physics and Finance," Papers 2403.09761, arXiv.org.
    12. Qian Li & Li Wang, 2023. "Option pricing under jump diffusion model," Papers 2305.10678, arXiv.org.
    13. Mauricio Contreras G. & Roberto Ortiz H, 2021. "Three little arbitrage theorems," Papers 2104.10187, arXiv.org.
    14. Mei-Ling Cai & Zhang-HangJian Chen & Sai-Ping Li & Xiong Xiong & Wei Zhang & Ming-Yuan Yang & Fei Ren, 2022. "New volatility evolution model after extreme events," Papers 2201.03213, arXiv.org.
    15. Carl Chiarella & Christina Nikitopoulos Sklibosios & Erik Schlogl, 2007. "A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton Models with Jumps," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(5), pages 365-399.
    16. Alexander Lipton, 2023. "Kelvin Waves, Klein-Kramers and Kolmogorov Equations, Path-Dependent Financial Instruments: Survey and New Results," Papers 2309.04547, arXiv.org.
    17. Christian Bayer & Blanka Horvath & Aitor Muguruza & Benjamin Stemper & Mehdi Tomas, 2019. "On deep calibration of (rough) stochastic volatility models," Papers 1908.08806, arXiv.org.
    18. Baron Law, 2021. "Correlation Estimation in Hybrid Systems," Papers 2111.06042, arXiv.org, revised Jul 2023.
    19. Frezza, Massimiliano & Bianchi, Sergio & Pianese, Augusto, 2021. "Fractal analysis of market (in)efficiency during the COVID-19," Finance Research Letters, Elsevier, vol. 38(C).
    20. Berend Roorda & J. M. Schumacher & Jacob Engwerda, 2005. "Coherent Acceptability Measures In Multiperiod Models," Mathematical Finance, Wiley Blackwell, vol. 15(4), pages 589-612, October.

    More about this item

    Keywords

    Volatility target strategy; Structured investment products with capital protection; Participation rate; Pricing of embedded option;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:revdev:v:21:y:2018:i:2:d:10.1007_s11147-017-9138-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.