Implied risk aversion: an alternative rating system for retail structured products

This article proposes implied risk aversion as a rating methodology for retail structured products. Implied risk aversion is based on optimal expected utility risk measures as introduced by Geissel et al. (Stat Risk Model 35(1-2):73-87, 2017) and, in contrast to standard V@R-based ratings, takes into account both the upside potential and the downside risks of such products. In addition, implied risk aversion is easily interpreted in terms of an individual investor's risk aversion: a product is attractive for an investor if his individual relative risk aversion is smaller than the product's implied risk aversion. We illustrate our approach in a case study with more than 15,000 short-term warrants on DAX that highlights some differences between our rating system and the traditional V@R-based approach.