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Catering to Investors Through Security Design: Headline Rate and Complexity

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  • Claire Célérier
  • Boris Vallée

Abstract

This study investigates how banks design financial products to cater to yield-seeking investors. We focus on a large market of investment products targeted exclusively at households: retail structured products. These products typically offer a high return under their best-case scenario—the headline rate—that is nested in a complex payoff formula. Using a text analysis of the payoff formulas of the 55,000 products issued in Europe from 2002 to 2010, we measure product headline rates, complexity, and risk. Over this period, product headline rates depart from the prevailing interest rates as the latter decrease, complexity increases, and risky products become more common. In the cross section, the headline rate of a product is positively correlated with its level of complexity and risk. Higher headline rate, more complex, and riskier products appear more profitable to the banks distributing them. Our results suggest that financial complexity is a by-product of banks catering to yield-seeking investors.

Suggested Citation

  • Claire Célérier & Boris Vallée, 2017. "Catering to Investors Through Security Design: Headline Rate and Complexity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1469-1508.
    • Handle: RePEc:oup:qjecon:v:132:y:2017:i:3:p:1469-1508.
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    File URL: http://hdl.handle.net/10.1093/qje/qjx007
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    Cited by:

    1. Falkinger Josef, 2023. "Gibt es die Marktwirtschaft noch? : Ein Versuch über politische Ökonomie im einundzwanzigsten Jahrhundert," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 24(1), pages 110-128, April.
    2. Sorravich Kingsuwankul & Chloe Tergiman & Marie Claire Villeval, 2023. "Why do oaths work? Image concerns and credibility in promise keeping," Working Papers hal-04209489, HAL.
    3. Klára Katona, 2020. "Is Lack of Morality an Explanation for the Economic and Financial Crisis? A Catholic Point of View," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(4), pages 407-418, November.
    4. Eva M. Sierminska & Jacques Silber, 2020. "The diversity of household assets holdings in the United States in 2007 and 2009: measurement and determinants," Review of Economics of the Household, Springer, vol. 18(3), pages 599-634, September.
    5. Erik Eyster & Matthew Rabin & Dimitri Vayanos, 2019. "Financial Markets Where Traders Neglect the Informational Content of Prices," Journal of Finance, American Finance Association, vol. 74(1), pages 371-399, February.
    6. Botta, Alberto & Caverzasi, Eugenio & Russo, Alberto, 2022. "When complexity meets finance: A contribution to the study of the macroeconomic effects of complex financial systems," Research Policy, Elsevier, vol. 51(8).
    7. Itzhak Ben-David & Francesco A. Franzoni & Byungwook Kim & Rabih Moussawi, 2021. "Competition for Attention in the ETF Space," Swiss Finance Institute Research Paper Series 21-03, Swiss Finance Institute.
    8. Basu, Anup K. & Dulleck, Uwe, 2020. "Why do (some) consumers purchase complex financial products? An experimental study on investment in hybrid securities," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 203-220.
    9. Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralised Finance," BIS Working Papers 1061, Bank for International Settlements.
    10. Victoria Ivashina & Boris Vallee, 2020. "Weak Credit Covenants," NBER Working Papers 27316, National Bureau of Economic Research, Inc.
    11. Lammer, Dominique Marcel & Hanspal, Tobin & Hackethal, Andreas, 2020. "Who are the Bitcoin investors? Evidence from indirect cryptocurrency investments," SAFE Working Paper Series 277, Leibniz Institute for Financial Research SAFE.
    12. Francesco D'Acunto & Laurent Frésard, 2018. "Finance, Talent Allocation, and Growth," CESifo Working Paper Series 6883, CESifo.

    More about this item

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • G1 - Financial Economics - - General Financial Markets
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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