Engineering Lemons

Petra Vokata
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Petra Vokata: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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 first-order dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

JEL-codes: G13 G14 G18 G4 (search for similar items in EconPapers)
Date: 2020-10
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2020-21

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