Engineering lemons

Petra Vokata

Journal of Financial Economics, 2021, vol. 142, issue 2, 737-755

Abstract: Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: Financial innovation benefits its adopters. In my 2006–2015 sample of over 28,000 yield enhancement products (YEP), the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees. On average, YEPs charge 6–7% in annual fees and subsequently lose 6–7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often statewise dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

Keywords: Household finance; Financial innovation; Hidden costs; Complexity; Structured products (search for similar items in EconPapers)
JEL-codes: G13 G14 G41 G53 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:737-755

DOI: 10.1016/j.jfineco.2021.04.035

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