Pricing And Optimization Of Interval Cumulative Structured Products Based On Prospect Theory

In recent years,as China's economy has undergone a transformation from highspeed growth to high-quality development,financial markets have also changed.The guidance on standardizing the asset management business of financial institutions promulgated in 2018 clearly states that the asset management business shall not promise to guarantee capital and earnings,and shall break the rigid payment system.As one of the main players in the financial market,commercial Banks also innovate products and seize more market shares in the historical process of reform.Among them,structured products have also become the focus of many domestic and foreign issuers.Aiming at the complex structure design of structured products,this paper analyzes the pricing of products under two different assumptions,and puts forward optimization Suggestions for the pricing model of structured products.Based on the assumption of rational man,the trend of the pricing model is complicated,but the practicability of the pricing model is decreasing.At the same time,with the development of behavioral finance,prospect theory has been applied to the financial asset pricing model.Therefore,this paper proposes to add prospect theory to the pricing of structured products and explore the pricing results under different assumptions from the perspective of rationality and irrationality.We select an interval cumulative structured financial product(no.117693)issued by China merchants bank and linked to the HS300 index as a case to make an empirical analysis.Firstly,through the analysis of the sequence of return rate of HS300 index,it is found that the sequence of return rate has the characteristic of peak and thick tail,and the sequence of return rate does not follow the normal distribution.To make the pricing model more accurate,we used GARCH(1,1)model to correct the volatility of the index yield.Then,according to the expected revenue of the product,it is linked to the specific performance of HS300 index every day,which has a strong path dependence.Therefore,Monte-Carlo simulation pricing method is adopted to price the product.The theoretical value of each product of the structured financial product is 1.0158 yuan by program simulation calculation,which is taken as the theoretical value of the case product under the assumption of risk-neutral condition.At the same time,we price the products according to the value function and weight function of prospect theory,and get the prospect theory value of each product is 1.0024 yuan.Comparing the two pricing results,it is found that the results under both assumptions show that there is a premium for structured products,but the difference is that the product valuation under the hypothesis of prospect theory is less than that under the risk-neutral condition.Generally speaking,the pricing model based on prospect theory can explain different market phenomena of investors' buying behavior with different risk preferences,which is of more practical significance.In this paper,the development status,rate of return and related risks of structured products are also described and introduced.Risk-neutral pricing and prospect pricing can be considered as the product value in the eyes of publishers and investors respectively.From the publisher's point of view,the ultimate goal of product optimization by the publisher is to increase the profitability and attractiveness of the product.On the one hand,it can increase profits by improving pricing level and risk management ability.On the other hand,increase the innovation and lower the threshold to improve the attractiveness.From the perspective of investors,we advocate rational purchase of products in line with their risk tolerance and enhance their professional ability.In the case that the product is profitable at a premium,it is discussed whether investors can arbitrage to obtain profits.