The Price Effects of Innovative Security Design

29 Pages Posted: 8 Jul 2021

See all articles by Claire Celerier

Claire Celerier

University of Toronto - Rotman School of Management

Boris Vallee

Harvard Business School - Finance Unit

Gordon Liao

Circle Internet Financial

Date Written: July 6, 2021

Abstract

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

Suggested Citation

Celerier, Claire and Vallee, Boris and Liao, Gordon, The Price Effects of Innovative Security Design (July 6, 2021). Rotman School of Management Working Paper No. 3881268, Available at SSRN: https://ssrn.com/abstract=3881268 or http://dx.doi.org/10.2139/ssrn.3881268

Claire Celerier (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Boris Vallee

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Gordon Liao

Circle Internet Financial ( email )

Boston, MA

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