The performance of individual investors in structured financial products
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This paper is the first to measure individual investors’ realized risk-adjusted performance in structured financial products, which represent one of the key financial innovations in recent times. Based on a large database of trades and portfolio holdings for 10,652 retail investors in discount and bonus certificates and common stocks, we find that (1) investors typically realize negative alphas in structured financial products, even when transaction costs are ignored. (2) Their underperformance increases with product complexity, which results from the higher implicit price premiums charged by the issuing banks for the more complex products and from the investors’ poor selection of products that have complex payoff specifications. (3) Investors also make poor choices when selecting the underlying assets for their structured product investments. This is merely a reflection of the poor stock selection abilities which also leads to a significant underperformance for their equity portfolios. (4) Certificate and stock investors are prone to the disposition effect. Overall, these findings suggest that retail investors may require some form of protection to avoid incurring these losses.
KeywordsStructured products Derivatives Complexity Financial innovation Investor behavior
JEL ClassificationG11 G12 D83
Part of this research was undertaken while Marco Wilkens was visiting the University of Sydney. We thank the participants of the 2nd European Retail Investment Conference in Stuttgart, the 2013 Asian Finance Association Annual Meeting in Nanchang, and the 30th International French Finance Association Conference in Lyon. We would like to thank Rainer Baule for providing us valuable data on certificate characteristics. Some of the data used in this paper were supplied by Securities Industry Research Centre of Asia–Pacific (SIRCA) on behalf of Thomson Reuters.
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