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The dark side of financial innovation: A case study of the pricing of a retail financial product

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  • Henderson, Brian J.
  • Pearson, Neil D.
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    Abstract

    The offering prices of 64 issues of a popular retail structured equity product were, on average, almost 8% greater than estimates of the products' fair market values obtained using option pricing methods. Under reasonable assumptions about the underlying stocks' expected returns, the mean expected return estimate on the structured products is slightly below zero. The products do not provide tax, liquidity, or other benefits, and it is difficult to rationalize their purchase by informed rational investors. Our findings are, however, consistent with the recent hypothesis that issuing firms might shroud some aspects of innovative securities or introduce complexity to exploit uninformed investors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 2 (May)
    Pages: 227-247

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:227-247

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Structured products Financial innovation Derivatives Pricing;

    References

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    Cited by:
    1. Thorsten Beck & Tao Chen & Chen Lin & Frank M. Song, 2012. "Financial Innovation: The Bright and the Dark Sides," Working Papers 052012, Hong Kong Institute for Monetary Research.
    2. Sadettin Haluk Citci, 2014. "Agency and Transparency in Financial Markets," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 110-120, March.
    3. Arnold, Marc & Schuette, Dustin & Wagner, Alexander, . "Pay Attention or Pay Extra: Evidence on the Compensation of Investors for the Implicit Credit Risk of Structured Products," Working Papers on Finance 1406, University of St. Gallen, School of Finance.
    4. Orhan Erdem & Evren Arik & Serkan Yuksel, 2014. "Trading Puzzle," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 66-81, March.
    5. Ege Yazgan, 2014. "The effect of investors' confidence on monetary policy- economic growth relationship: a Multivariate GARCH approach," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 82-109, March.
    6. Tzu-Kuan Chiu, 2014. "Putting Responsible Finance to Work for Citi Microfinance," Journal of Business Ethics, Springer, vol. 119(2), pages 219-234, January.
    7. Franklin Allen, 2012. "Trends in Financial Innovation and Their Welfare Impact: An Overview," DNB Working Papers 355, Netherlands Central Bank, Research Department.
    8. Baule, Rainer, 2011. "The order flow of discount certificates and issuer pricing behavior," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3120-3133, November.
    9. Erner, Carsten & Klos, Alexander & Langer, Thomas, 2013. "Can prospect theory be used to predict an investor’s willingness to pay?," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1960-1973.
    10. Mehmet Balcilar & Riza Demirer, 2014. "The Effect of Global Shocks and Volatility on Herd Behavior in Borsa Istanbul," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 142-172, March.
    11. Kosfeld, Michael & Schüwer, Ulrich, 2014. "Add-on pricing in retail financial markets and the fallacies of consumer education," SAFE Working Paper Series 47, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    12. Fabian Kuehnhausen, 2014. "The Impact of Financial Innovation on Firm Stability," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 211-239, March.
    13. W. Scott Frame & Lawrence J. White, 2014. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 14-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    14. M. Shahid Ebrahim & Seema Makhdoomi & Mustapha Sheikh, 2012. "The Political Economy and the Perennial Underdevelopment of the Muslim World," Working Papers 12011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    15. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    16. Ahmet Duran & Burhaneddin Izgi, 2014. "Comovement and Polarization of Interest Rate and Stock Market in Turkey," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 130-141, March.
    17. Hamid Mohtadi & Stefan Ruediger, 2014. "Volatility and Transparency of Financial Markets in the MENA Region," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 173-195, March.
    18. Suleyman Hilmi Kal & Nuran Arslaner & Ferhat Arslaner, 2014. "Inflation Dynamics and Business Cycles," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 121-129, March.
    19. Guzin Gulsun Akin & Ahmet Faruk Aysan & Gültekin Gollu & Levent Yildiran, 2014. "Formal and Informal Regulations for Credit Card Payment Services," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 1-33, March.
    20. Sezer Bozkus Kahyaoglu & M. Vedat Pazarlioglu, 2014. "Hedging Strategy for Electricity Market Price Volatility: The Case of Turkish Electricity Market," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 196-210, March.
    21. Antonina Waszczuk, 2014. "Assembling International Equity Datasets – Review of Studies on the Cross-Section of Common Stocks," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 34-65, March.

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