Catering to investors through product complexity

Claire Celerier and Boris Vallee

No 14, ESRB Working Paper Series from European Systemic Risk Board

Abstract: This study investigates the rationale for issuing complex securities to retail investors. We focus on a large market of investment products targeted exclusively at households: retail structured products in Europe. We develop an economic measure of product complexity in this market via a text analysis of 55,000 product payoff formulas. Over the 2002–2010 period, product complexity increases, risky products become more common, and product headline rates diverge from the prevailing interest rates as the latter decline. The complexity of a product is positively correlated with its headline rate and risk. Complex products appear more profitable to the banks distributing them, have a lower expost performance, and are more frequently sold by banks targeting low-income households. These empirical facts are consistent with banks strategically using product complexity to cater to yield-seeking households. JEL Classification: I22, G10, D18, D12

Keywords: Catering; Financial Complexity; Household Finance; Reaching for Yield; Shrouding; Structured Product (search for similar items in EconPapers)
Date: 2016-06
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201614

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