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What drives performance in the speculative market of short-term exchange-traded retail products?

Stefanie Baller, Oliver Entrop, Alexander Schober and Marco Wilkens

No B-26-17, Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe from University of Passau, Faculty of Business and Economics

Abstract: This paper considers the realized returns of individual investors in warrants and leverage certificates. First, we derive a general formula that analytically decomposes the return into several economically meaningful components that are related to investor's trading behavior and the issuers' price-setting strategy. Second, we use a large trade dataset to analyze returns along these components and also link them to investors' risk taking strategy. Our main findings are threefold: (i) The overall performance is poor. (ii) Investors show neutral timing skills, while the main performance driver is the issuers' price-setting. (iii) Higher risk taking by investors diminishes the performance further. Our results imply that retail investors do not achieve a pecuniary benefit from the considered financial innovations.

Keywords: Leverage Certificate; Warrant; Financial Innovation; Retail Investor; Performance (search for similar items in EconPapers)
JEL-codes: D40 G11 G21 G24 (search for similar items in EconPapers)
Date: 2017
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