Asset Complexity and the Return Gap

80 Pages Posted: 28 Apr 2020 Last revised: 20 May 2022

See all articles by Pengjie Gao

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Allen Hu

Yale School of Management

Peter Kelly

University of Notre Dame

Cameron Peng

London School of Economics & Political Science (LSE) - Department of Finance

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Tsinghua University - PBC School of Finance

Date Written: May 19, 2022

Abstract

Existing research finds that investors’ returns vary with their wealth and level of sophistication. We bring a new perspective from the supply side by showing that return heterogeneity can be magnified as assets offered by the market become more complex. Using detailed account-level data, we examine the trading of B funds—complex, structured products in the Chinese market. During a three-year market cycle, the return gap between the naive and sophisticated is an order-of-magnitude greater when trading B funds than when trading simple, non-structured funds. In an event study, we confirm that this disparity is driven by differences in investors’ understanding of product complexity.

Keywords: Complexity, Household Finance

Suggested Citation

Gao, Pengjie and Hu, Allen and Kelly, Peter and Peng, Cameron and Zhu, Ning, Asset Complexity and the Return Gap (May 19, 2022). Available at SSRN: https://ssrn.com/abstract=3554402 or http://dx.doi.org/10.2139/ssrn.3554402

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Allen Hu

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

HOME PAGE: http://www.anallenhu.com

Peter Kelly (Contact Author)

University of Notre Dame ( email )

251 Mendoza
South Bend, IN 46637
United States

Cameron Peng

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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