Investment Analysis of Autocallable Contingent Income Securities

Autocallable contingent income securities (autocalls) have payouts contingent on the performance of an underlying asset and give investors an opportunity to earn high yields in a low-interest environment. The authors collected data on US-issued autocalls and modeled a typical autocall under various assumptions, finding that they are issued on underlying assets that display high volatility, high prices, and negative skewness. Incorporating stochastic volatility into the model explains some of the overpricing routinely reported in prior studies.