What drives Performance in the Speculative Market of Short-term Exchange-traded Retail Products?
55 Pages Posted: 29 Aug 2012 Last revised: 1 Jul 2016
Date Written: June 2016
This paper considers the realized returns of individual investors in warrants and leverage certificates. First, we derive a general formula that analytically decomposes the return into several economically meaningful components that are related to investor’s trading behavior and the issuers’ price-setting strategy. Second, we use a large trade dataset to analyze returns along these components and also link them to investors’ risk taking strategy. Our main findings are threefold: (i) The overall performance is poor. (ii) Investors show neutral timing skills, while the main performance driver is the issuers’ price-setting. (iii) Higher risk taking by investors diminishes the performance further. Our results imply that retail investors do not achieve a pecuniary benefit from the considered financial innovations.
Keywords: Leverage Certificate; Warrant; Financial Innovation; Retail Investor
JEL Classification: D40, G11, G21, G24
Suggested Citation: Suggested Citation