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What Drives Financial Complexity? A Look into the Retail Market for Structured Products

Author

Listed:
  • Claire Célérier

    (Banque de france - Banque de France)

  • Boris Vallée

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

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, 2013. "What Drives Financial Complexity? A Look into the Retail Market for Structured Products," Working Papers hal-02058239, HAL.
    • Handle: RePEc:hal:wpaper:hal-02058239
    DOI: 10.2139/ssrn.2289890
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    Cited by:

    1. Michaelides, Alexander, 2014. "What Happened in Cyprus?," CEPR Discussion Papers 9993, C.E.P.R. Discussion Papers.
    2. Fuchs-Schündeln, Nicola & Haliassos, Michael, 2015. "Does product familiarity matter for participation?," SAFE Working Paper Series 63, Leibniz Institute for Financial Research SAFE, revised 2015.
    3. Rossen Valkanov & Andra Ghent, 2014. "Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors," 2014 Meeting Papers 104, Society for Economic Dynamics.
    4. Junyong He & Helen Hui Huang & Shunming Zhang, 2020. "Ambiguity Aversion, Information Acquisition, and Market Opacity," Annals of Economics and Finance, Society for AEF, vol. 21(2), pages 263-329, November.
    5. Fuchs-Schündeln, Nicola & Haliassos, Michael, 2021. "Participation following sudden access," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 671-688.
    6. Arnold, Marc & Schuette, Dustin & Wagner, Alexander, 2014. "Neglected Risk: Evidence from Structured Product Counterparty Exposure," Working Papers on Finance 1406, University of St. Gallen, School of Finance, revised Apr 2016.

    More about this item

    Keywords

    Household Finance; Financial Literacy; Complexity;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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