The performance of individual investors in structured financial products

Oliver Entrop (), Michael McKenzie (), Marco Wilkens () and Christoph Winkler ()
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Oliver Entrop: University of Passau
Michael McKenzie: University of Liverpool Management School
Marco Wilkens: University of Augsburg
Christoph Winkler: University of Augsburg

Review of Quantitative Finance and Accounting, 2016, vol. 46, issue 3, No 5, 569-604

Abstract: Abstract 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.

Keywords: Structured products; Derivatives; Complexity; Financial innovation; Investor behavior (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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DOI: 10.1007/s11156-014-0479-8

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