63 Pages Posted: 15 Mar 2019
Date Written: June 27, 2018
Banks engineer and sell to U.S. households complex securities with attractive yields but negative returns. I document this in a sample of over 20,000 yield enhancement products (YEP), which became a $20 billion market after the post-crisis fall in interest rates. YEPs carry a significant downside risk and, according to regulators, are frequently missold to inexperienced investors. The products lose money both ex ante and ex post due to their largely hidden fees: on average, YEPs charge 7% in annual fees and subsequently lose 7% relative to risk-adjusted benchmarks. The fees remain large even after the SEC mandated disclosure of product values.
Keywords: Financial Engineering, Yield Enhancement, Hidden Prices, Complexity
JEL Classification: G4, G13, G14, G18
Suggested Citation: Suggested Citation