Charles A. Dice Center Working Paper No. 2020-21
77 Pages Posted: 4 Sep 2020 Last revised: 28 Oct 2020
Date Written: June 27, 2018
Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: financial innovation benefits its adopters. In my 2006–2015 sample of over 28,000 yield enhancement products (YEP) the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees: on average, YEPs charge 6–7% in annual fees and subsequently lose 6–7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often first-order dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.
Keywords: Household finance; financial innovation; hidden costs; complexity; structured products
JEL Classification: G4, G13, G14, G18
Suggested Citation: Suggested Citation