How Does Pricing Affect Investors’ Product Choice? Evidence from the Market for Discount Certificates

Posted: 31 Mar 2014 Last revised: 24 Apr 2016

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Georg Fischer

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: 2016

Abstract

This paper examines the choices of retail investors in the market for structured financial products with a focus on implicit and explicit pricing components. We evaluate more than 72,000 single stock discount certificates on a daily basis from 2004 through 2008. The certificates are quoted an average of 0.58% above their fair value before the financial crisis, increasing to 1.24% during 2008. Although credit risk explains a major part (39%) of the certificates’ overpricing, we find that issuer default risk does not have any influence on investors’ product choices. Instead, retail investors are strongly influenced by irrational factors such as issuer and product familiarity. Finally, investors are found to make poor product choices (in terms of bid/ask spreads and markups over fair value), resulting in significant losses.

Keywords: Structured products, Derivatives, Investor behavior, Product pricing

JEL Classification: G11, G12, D83

Suggested Citation

Entrop, Oliver and Fischer, Georg and McKenzie, Michael David and Wilkens, Marco and Winkler, Christoph, How Does Pricing Affect Investors’ Product Choice? Evidence from the Market for Discount Certificates (2016). Journal of Banking and Finance, Vol. 68, 195-215. Available at SSRN: https://ssrn.com/abstract=2417775 or http://dx.doi.org/10.2139/ssrn.2417775

Oliver Entrop

University of Passau ( email )

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

Georg Fischer

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

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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