||Structured notes have become the main profit-making source of the financial industry in recent years. Institutional investors and retail investors together are all eager to include it in their portfolio. Without strict regulations guiding the sale of structured notes, investors are now feeling the pains from substantial losses caused by the financial crisis.|
The research studies thirty structured notes of the equity index type and interest rate type launched in the period from 2006 to 2008. Based on style analysis as the main research model, this thesis decomposes structured notes and analyzes its return and risk characteristics. Style analysis can determine the premium rate of structured notes and make asset allocation decisions by combining the structured notes with traditional fixed-income and equity investments. This methodology can help the issuers and investors manage risk in the future.
This research concludes that the index type and interest rate type of the structured notes show the low risk and the unattractive returns. The return is similar to about the level of the deposit rate or government bonds. The main reason is that the design of return distribution is unable to obtain higher return effectively. Besides, the result shows that the weight of underlying is too low by style analysis to earn the excess return that the underlying offers. And the weight of fixed income is above 90 percent. It means that the structure d notes are still the investment of fixed income.
In addition, using the weight of style analysis to estimate the premium rate, meaning the difference percentage of real value and selling value, we find that the estimation of premium rate for single underlying structured notes are more accurate than for multi-underlying structured notes. The error is from 0.2 percent to 0.7 percent. The result of style analysis could not predict accurately, so that the forecasting error of premium rate is bigger.
Finally, the result from multi-factors model shows that the funds allocation of the structure notes is not efficient. Only on the portfolio of low return and low risk, few funds distribute to the structure notes, just about 5 percents. On the portfolio of high return and high risk, the weight of structure note is almost to zero. For the investors that have higher risk tolerance, the structure notes don’t fit the demand of the investor.