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Catering to investors through product complexity

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  • Claire Célérier
  • Boris Vallée

Abstract

This study investigates the rationale for issuing complex securities to retail investors. We focus on a large market of investment products targeted exclusively at households: retail structured products in Europe. We develop an economic measure of product complexity in this market via a text analysis of 55,000 product payoff formulas. Over the 2002–2010 period, product complexity increases, risky products become more common, and product headline rates diverge from the prevailing interest rates as the latter decline. The complexity of a product is positively correlated with its headline rate and risk. Complex products appear more profitable to the banks distributing them, have a lower expost performance, and are more frequently sold by banks targeting low-income households. These empirical facts are consistent with banks strategically using product complexity to cater to yield-seeking households. JEL Classification: I22, G1, D18, D12

Suggested Citation

  • Claire Célérier & Boris Vallée, 2016. "Catering to investors through product complexity," ESRB Working Paper Series 14, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201614
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Complexity; Catering; Shrouding; Reaching for Yield; Household Finance; Structured Product;

    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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