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Asset complexity and the return gap

Author

Listed:
  • Gao, Pengjie
  • Hu, Allen
  • Kelly, Peter
  • Peng, Cameron
  • Zhu, Ning

Abstract

Existing research finds that investors' returns vary with their wealth and level of sophistication. We bring a new perspective from the supply side by showing that return heterogeneity can be magnified as assets offered by the market become more complex. Using detailed account-level data, we examine the trading of B funds-complex, structured products in the Chinese market. During a 3-year market cycle, the return gap between the naive and sophisticated is an order-of-magnitude greater when trading B funds than when trading simple, non-structured funds. In an event study, we confirm that this disparity is driven by differences in investors' understanding of product complexity.

Suggested Citation

  • Gao, Pengjie & Hu, Allen & Kelly, Peter & Peng, Cameron & Zhu, Ning, 2024. "Asset complexity and the return gap," LSE Research Online Documents on Economics 122520, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:122520
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    File URL: http://eprints.lse.ac.uk/122520/
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    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G00 - Financial Economics - - General - - - General

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