Structured retail products: risk-sharing or risk-creation?

40 Pages Posted: 17 Oct 2023 Last revised: 1 Nov 2024

See all articles by Otávio Bitu

Otávio Bitu

London School of Economics & Political Science, Department of Finance, Students

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

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

Bitu, Otávio and Giovannetti, Bruno and Guimaraes, Bernardo, Structured retail products: risk-sharing or risk-creation? (November 01, 2024). Available at SSRN: https://ssrn.com/abstract=4578008 or http://dx.doi.org/10.2139/ssrn.4578008

Otávio Bitu

London School of Economics & Political Science, Department of Finance, Students ( email )

London
Great Britain

Bruno Giovannetti (Contact Author)

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva, 474
Sao Paulo
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
346
Abstract Views
1,252
Rank
172,081
PlumX Metrics