Statistics Seminar（2017-07）

Topic:Can Financial Innovation Succeed by Catering to Behavioral Preferences? Evidence from a Callable Options Market

Speaker:Xuewei Yang, Nanjing University

Time:Thursday, April 6, 14:00-15:00

Place:Room 217, Guanghua Building 2

Abstract:

We examine the notion that financial products which cater to investors' behavioral biases can attain popularity and yield substantial profits for issuers. Our setting considers options with a callback feature, namely, callable bull/bear contracts (CBBCs). These contracts have high skewness when close to callback and thus appeal to cumulative prospect theory preferences. CBBCs with high skewness earn negative average returns, and issuer profits vary positively with CBBC skewness. Over the 2009-2014 period, issuers earn (investors lose) the equivalent of $1.66 billion by trading CBBCs on the Hang Seng index. These findings highlight the role of behavioral finance in financial innovation.

Introduction:

Xuewei Yang is an Associate Professor of Finance at the School of Management and Engineering, Nanjing University. He received a B.Sc. in mathematics from Xidian University in 2006 and a Ph.D. in probability and statistics from Nankai University in 2011. From January 2012 through January 2013, he was a postdoc fellow in finance at the City University of Hong Kong. He is mainly interested in derivative pricing, investor behavior and credit risk. He has published over 20 papers in academic journals such as Mathematical Finance and Quantitative Finance. His work has been presented at many prestigious conferences such as the American Finance Association meetings, the Western Finance Association meetings, the Miami Behavioral Finance Conference, and the China International Conference in Finance. He served as a session chair at the INFORMS annual meeting in 2015 and 2016. His paper (co-authored with Haitao Li and Tao Li) on sovereign credit risk won the “GARP Risk Management Research Award” in 2014.

//www.math.uiuc.edu/~xwyang/

Your participation is warmly welcomed!