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Fallacies of Risk Control

Author

Listed:
  • Jurgen Vandenbroucke

Abstract

This paper demonstrates how risk control as applied to popular investment products can be based on a fallacy. In scope are option-based capital protected products and rules-based portfolio insurance products. In case of structured products risk control shifts the option¡¯s volatility risk from the product provider to the end investor. The investor is presented a different product, for better or for worse, and not an improved version of the ¡°base¡± product. Adding risk control to the risky asset of portfolio insurance leaves the portfolio allocation unchanged if, for good reasons, market exposure is already inversely linked to volatility. The investor receives nothing else but the ¡°base¡± product, be it in a commercially more appealing presentation.

Suggested Citation

  • Jurgen Vandenbroucke, 2015. "Fallacies of Risk Control," Applied Economics and Finance, Redfame publishing, vol. 2(2), pages 23-28, May.
    • Handle: RePEc:rfa:aefjnl:v:2:y:2015:i:2:p:23-28
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    Citations

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    Cited by:

    1. Raquel M. Gaspar & Paulo M. Silva, 2019. "Investors’ Perspective on Portfolio InsuranceExpected Utility vs Prospect Theories," Working Papers REM 2019/92, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Ine Marquet & Wim Schoutens, 2018. "CONIC CPPIs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-20, March.

    More about this item

    Keywords

    risk control; volatility; structured products; portfolio insurance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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