Pricing And Optimization Of Interest-Linked Structured Products Based On Prospect Theory

Structured financial products are generally a combination of fixed income assets and a derivative security,its revenue is tied to the performance of the derivatives.With the development of behavioral finance,the prospect theory and the concept of mental accounting have been deeply studied by scholars.When the investor's psychological factors are added to the model,it is found that the results are more suitable to explain the real performance of the market.This is because investors in the market tend to be irrational,they have a risk aversion to earnings,and a loss aversion to expense,which will affect their decisions and thus affecting the price.This thesis mainly analyzes the pricing of interest rate linked structured financial products in the context of risk neutral and Prospect Theory.First of all,a structured product of Libor interest rate of 3 months is selected as the research object.The LIBOR Market Model is used to analyze the pricing under the risk neutral condition.Secondly,combined with the value function and weighting function of prospect theory,the pricing model of the prospect theory is deduced.Finally,the thesis compares the pricing under the two conditions.Taking the par value distribution as the objective function,the optimal design of the product is achieved by the calibration of the payoff function and cumulative interval.This thesis uses the prospect theory to derive the pricing model of structured financial products and then to modify the model parameters.After that,this thesis optimized the design of this product.Through the thesis,the prospect theory is found more fit for the real performance of the market.After optimization,the theoretical value of the product is similar to the market price,and it is close to the issue of parity.It is conducive to maintaining fair and stable market.