The Price Effects of Innovative Security Design
29 Pages Posted: 8 Jul 2021
Date Written: July 6, 2021
This paper investigates the effects of the issuance of retail products with non-linear payoffs on option prices. For a given underlying asset, when the outstanding volume of products embedding a short-put position increases, implied volatility at the corresponding strike decreases. A similar pattern exists for the dividend term structure: larger outstanding volumes of retail structured products are associated with a flattened dividend term structured. A simple trading strategy exploiting this pattern leads to a Sharpe ratio above 2. These results are consistent with the existence of segmented markets and speak to the equilibrium effects of the retail demand for innovative securities.
Keywords: Security Design, Volatility, Dividend, Options, Structured Products, Market Segmentation
JEL Classification: G12, G14, G15, G23
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