Simple is Simply not Enough – Features versus Labels of Complex Financial Securities
Review of Derivatives Research, forthcoming
52 Pages Posted: 16 Nov 2020 Last revised: 27 Mar 2024
Date Written: February 2, 2024
Abstract
We examine how design features and labels of complex financial securities affect pricing and performance. Hence, we utilize the security design features required by the European Union’s Securitization Regulation and the optional STS label (“Simple, Transparent, and Standardized”). Based on a unique dataset of European securitizations with 31 million quar-terly loan observations, we find that investors hardly consider the features but rely on the existence of the label, although the latter has no performance-increasing effect. Our results reveal that investors neglect a proper risk assessment and misinterpret the easily accessible label as a signal of superior performance.
Keywords: asset-backed securities; EU securitization regulation; simple, transpar-ent, standardized (STS); loan performance; complex securities
JEL Classification: D82, G01, G18, G21
Suggested Citation: Suggested Citation