Quantitative analysis on KID: methodologies for the computation of performance scenarios

On 9 December 2014, the Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on Key Information Documents (KID) for Packaged Retail and Insurance-based Investment Products (“PRIIPs Regulation”) has been published in the Official Journal of the European Union. The purpose of the PRIIPs Regulation is to improve information disclosures and protection of retail investors with the provision of a key information document (KID) prior to the subscription of a packaged retail and insurance-based investment product (“PRIIP”). This document contains both qualitative and quantitative information which aim to provide general information on the product, indicate the level of risk of the PRIIP, identify all the costs related to the PRIIP and their impact on return and illustrate the different payoffs of the product across different periods and market conditions, known as performance scenarios. These scenarios represent the various possible outcomes of the investment and, in order to compute them, the KIDs producers have to follow guidelines specified within the Regulatory Technical Standards (RTS) set out by the European Supervisory Authorities. The purpose of this work is to discuss the merits of the methodology provided by the RTS to compute the performance scenarios, with respect to Category 3 PRIIPs, by analysing its results and its drawbacks, and to present an alternative model that will be finally compared with the first one.