The valuation “by-tranche” of composite investment instruments

Doron Sonsino; Mosi Rosenboim; Tal Shavit

doi:10.1007/s11238-016-9567-7

The valuation “by-tranche” of composite investment instruments

Doron Sonsino, Mosi Rosenboim, Tal Shavit

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

The return on composite investment instruments takes the form of weighted-average, derived from two economic indicators or more. Three experiments illustrate that prospective investors tend to valuate composites “by-tranche”, consistently violating the premise of reduction. Valuation-by-tranche shows for uncertain and risky composites and reflects in allocation problems and binary choice. The willingness to invest still strongly increases when one tranche hedges against the other, suggesting that reduced-form considerations may interfere with the inclination to value by part. A hybrid model where investors weight the values of tranches, but also respond to the reduced-form, approximates the data most accurately.

Original language	English
Pages (from-to)	353-393
Number of pages	41
Journal	Theory and Decision
Volume	82
Issue number	3
DOIs	https://doi.org/10.1007/s11238-016-9567-7
State	Published - 1 Mar 2017
Externally published	Yes

Keywords

Composite investments
Correlation neglect
Frame invariance
Increasing marginal disutility of loss
Limited loss aversion

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10.1007/s11238-016-9567-7

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abstract = "The return on composite investment instruments takes the form of weighted-average, derived from two economic indicators or more. Three experiments illustrate that prospective investors tend to valuate composites “by-tranche”, consistently violating the premise of reduction. Valuation-by-tranche shows for uncertain and risky composites and reflects in allocation problems and binary choice. The willingness to invest still strongly increases when one tranche hedges against the other, suggesting that reduced-form considerations may interfere with the inclination to value by part. A hybrid model where investors weight the values of tranches, but also respond to the reduced-form, approximates the data most accurately.",

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The valuation “by-tranche” of composite investment instruments

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Keywords

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