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Neglected Risk: Evidence from Structured Product Counterparty Exposure

  • Arnold, Marc

    ()

  • Schuette, Dustin
  • Wagner, Alexander

We show that initial offering prices of simple structured products do not reflect issuer credit risk before the Lehman default. After this event, credit risk is no longer neglected. Issuers then compensate general and even product-specific counterparty exposure. We find that investor attention toward issuer credit risk is a critical determinant of the occurrence of neglected risk. Additionally, banks have a propensity to construct products with larger counterparty exposure. Overall, our results shed light on whether and under which conditions financial engineering generates neglected risk in the economy.

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File URL: http://ux-tauri.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: 49 pages
Date of creation: Mar 2014
Date of revision: Apr 2016
Handle: RePEc:usg:sfwpfi:2014:06
Contact details of provider: Phone: +41 71 243 40 11
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Web page: http://www.unisg.ch/de/universitaet/schools/finance

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