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Engineering Lemons

Author

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  • Vokata, Petra

    (Ohio State U)

Abstract

Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: financial innovation benefits its adopters. In my 2006-2015 sample of over 28,000 yield enhancement products (YEP) the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees: on average, YEPs charge 6-7% in annual fees and subsequently lose 6-7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often first-order dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

Suggested Citation

  • Vokata, Petra, 2020. "Engineering Lemons," Working Paper Series 2020-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2020-21
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G4 - Financial Economics - - Behavioral Finance

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