Yield enhancement and risk management benefits of structured products from the perspective of mean-variance spanning test model

Abstract

The thesis investigates whether structured products can enhance the risk-reward spectrum of the well-diversified portfolio of risky assets. The difficulties with traditional spanning tests proposed by Huberman and Kandel (1987) are, that they assume a normal distribution, give disproportionately more weight to the variance compared to the abnormal returns and do not deal well with small sample data. Therefore, the variations in spanning tests are used to overcome such difficulties.

The thesis uses general spanning test proposed by Huberman and Kandel (1987) along with the spanning test that controls for finite sample data initially proposed by Jobson and Korkie (1989) and the step-down application to get a more precise picture of what causes the rejection of spanning (i.e., risk, return or both simultaneously). Furthermore, since structured products depict negative skewness the spanning test will be recalculated using Wald-GMM test proposed by Kan and Zhou (2012) to control for non-normal distribution.

The study indicates that all structured products considered in the text add significant statistical diversification benefits to the portfolio of well-diversified assets. Moreover, the diversification benefits persist after controlling for structured product benchmarks as well.