Catering to Investors Through Product Complexity

45 Pages Posted: 5 Nov 2020

See all articles by Claire Célérier

Claire Célérier

University of Toronto

Boris Vallee

Harvard Business School - Finance Unit

Date Written: June, 2016

Abstract

This study investigates the rationale for issuing complex securities to retail investors. We focus on a large market of investment products targeted exclusively at households: retail structured products in Europe. We develop an economic measure of product complexity in this market via a text analysis of 55,000 product payoff formulas. Over the 2002–2010 period, product complexity increases, risky products become more common, and product headline rates diverge from the prevailing interest rates as the latter decline. The complexity of a product is positively correlated with its headline rate and risk. Complex products appear more profitable to the banks distributing them, have a lower expost performance, and are more frequently sold by banks targeting low-income households. These empirical facts are consistent with banks strategically using product complexity to cater to yield-seeking households.

Keywords: Financial Complexity, Catering, Shrouding, Reaching for Yield, Household Finance, Structured Product

JEL Classification: I22, G1, D18, D12

Suggested Citation

Célérier, Claire and Vallee, Boris, Catering to Investors Through Product Complexity (June, 2016). ESRB: Working Paper Series No. 2016/14, Available at SSRN: https://ssrn.com/abstract=3723360 or http://dx.doi.org/10.2139/ssrn.3723360

Claire Célérier (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, M5S 3G8
Canada

Boris Vallee

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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