The Performance of Individual Investors in Structured Financial Products

Posted: 16 Dec 2012 Last revised: 16 Mar 2016

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Michael D. McKenzie

The University of Sydney - Discipline of Finance; University of Cambridge - Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)

Marco Wilkens

University of Augsburg

Christoph Winkler

University of Augsburg

Date Written: 2015

Abstract

This paper is the first to measure individual investors’ realized risk-adjusted performance in structured financial products, which represent one of the key financial innovations in recent times. Based on a large database of trades and portfolio holdings for 10,652 retail investors in discount and bonus certificates and common stocks, we find that (1) investors typically realize negative alphas in structured financial products, even when transaction costs are ignored. (2) Their underperformance increases with product complexity, which results from the higher implicit price premiums charged by the issuing banks for the more complex products and from the investors’ poor selection of products that have complex payoff specifications. (3) Investors also make poor choices when selecting the underlying assets for their structured product investments. This is merely a reflection of the poor stock selection abilities which also leads to a significant underperformance for their equity portfolios. (4) Certificate and stock investors are prone to the disposition effect. Overall, these findings suggest that retail investors may require some form of protection to avoid incurring these losses.

Keywords: structured products, derivatives, complexity, financial innovation, investor behavior

JEL Classification: D83, G11, G12

Suggested Citation

Entrop, Oliver and McKenzie, Michael David and Wilkens, Marco and Winkler, Christoph, The Performance of Individual Investors in Structured Financial Products (2015). Review of Quantitative Finance and Accounting, Vol. 46, No. 3, 2016, pp. 569-604. Available at SSRN: https://ssrn.com/abstract=2189913 or http://dx.doi.org/10.2139/ssrn.2189913

Oliver Entrop

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Michael David McKenzie

The University of Sydney - Discipline of Finance ( email )

Level 2 9 Castlereagh Street
Sydney, NSW 2000
Australia
+61 2 9114 0578 (Phone)
+61 2 9351 6461 (Fax)

University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Marco Wilkens (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

Christoph Winkler

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4121 (Phone)
+49 821 598 4223 (Fax)

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