Engineering Lemons

63 Pages Posted: 15 Mar 2019

See all articles by Petra Vokata

Petra Vokata

Aalto University School of Business

Date Written: June 27, 2018

Abstract

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

Vokata, Petra, Engineering Lemons (June 27, 2018). 9th Miami Behavioral Finance Conference 2018. Available at SSRN: https://ssrn.com/abstract=3223427 or http://dx.doi.org/10.2139/ssrn.3223427

Petra Vokata (Contact Author)

Aalto University School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Register to save articles to
your library

Register

Paper statistics

Downloads
299
Abstract Views
1,472
rank
102,285
PlumX Metrics