Structured retail products: risk-sharing or risk-creation?
40 Pages Posted: 17 Oct 2023 Last revised: 1 Nov 2024
Date Written: November 01, 2024
Abstract
Financial institutions have been issuing increasingly complex structured retail products (SRPs) over time. Is risk-sharing the driving force behind this financial innovation? Does this innovation increase welfare? We propose a simple test to address these questions, relying only on standard measures of risk and return. If a particular type of SRP is not based on risk-sharing and instead adds risk to the financial system, we should observe an atypical negative relationship between risk and expected return across SRPs of that type. Testing this hypothesis on a sample of 1,847 SRPs, we find that while most SRP types serve as risk-sharing instruments, a prevalent category — autocallables — introduces additional, unbacked risk into the financial system.
Keywords: retail investors, risk and return, financial innovation, financial regulation
JEL Classification: G21, G28, G40, G50
Suggested Citation: Suggested Citation