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What Drives Financial Complexity? A Look into the European Retail Structured Products MarketClaire CelerierUniversity of Zurich - Department of Banking and Finance; Banque de France Boris ValleeHEC Paris - Finance Department November 11, 2012 Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper Abstract: This paper investigates the relationship between complexity and competition in household finance. We theoretically show how banks with heterogeneous market shares can use complexity to capture an informational rent from unsophisticated investors. This generates a U-shaped impact of competition on complexity. Using an academically unexploited database of all European issuances of retail structured products since inception, we provide empirical evidence for this prediction. When regressing complexity on competition, we observe a non-monotonous relationship. A cross-sectional regression on distributors' market powers shows that larger competitors offer more complex products. We also find that institutions targeting mainly unsophisticated consumers offer more complex products. These findings add to our understanding of the growing gap between financial complexity and investor sophistication, and how banks can strategically exploit it to their advantage.
Number of Pages in PDF File: 41 Keywords: Financial Literacy, Behavorial Finance, Household Finance, Complexity JEL Classification: I22, G1, D18, D12 working papers seriesDate posted: June 11, 2012 ; Last revised: November 19, 2012Suggested Citation |
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