Exploited by complexity

Pengjie Gao, Allen Hu, Peter Kelly, Cameron Peng and Ning Zhu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Due to their complex features, structured financial products can hurt the average investor. Are certain investors particularly vulnerable? Using account-level transaction data of retail structured funds, we show that the rich (sophisticated) benefit from complexity at the expense of the poor (naive). The poor-to-rich wealth transfer that results from trading structured funds is substantially greater than from trading simple, nonstructured funds. In an event study, we further confirm that part of this wealth transfer can be directly attributed to investors' differing responses to complexity. In particular, when a market crash triggers funds into a restructuring process and their prices are expected to shrink by half on a given day, the poor and naive subset of investors fails to respond effectively.

JEL-codes: G10 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2020-09-30
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/118867/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118867

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().