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Neglected Risk: Evidence from Structured Product Counterparty Exposure

  • Arnold, Marc

    ()

  • Schuette, Dustin
  • Wagner, Alexander

This paper analyzes whether and under which conditions financial engineering creates neglected risk. Issuers of structured products compensate both general issuer and issuer-product specific counterparty exposure when investor attention toward issuer default is high, such as after the Lehman default. Our results suggest that, even with simple products, neglected risk does not dissipate when the size of the risk increases, but only when attention increases. We also show that banks have a propensity to issue products with larger counterparty exposure, which is a crucial concern for the accumulation of neglected risk in the economy.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1406.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1406.

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Length: 52 pages
Date of creation: Mar 2014
Date of revision: Jan 2016
Handle: RePEc:usg:sfwpfi:2014:06
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/Schools/Finance.aspx

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