Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088335 | Journal of Banking & Finance | 2016 | 63 Pages |
Abstract
This paper examines the choices of retail investors in the market for structured financial products with a focus on implicit and explicit pricing components. We evaluate more than 72,000 single stock discount certificates on a daily basis from 2004 through 2008. The certificates are quoted an average of 0.58% above their fair value before the financial crisis, increasing to 1.24% during 2008. Although credit risk explains a major part (39%) of the certificates' overpricing, we find that issuer default risk does not have any influence on investors' product choices. Instead, retail investors are strongly influenced by irrational factors such as issuer and product familiarity. Finally, investors are found to make poor product choices (in terms of bid/ask spreads and markups over fair value), resulting in significant losses.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Oliver Entrop, Georg Fischer, Michael McKenzie, Marco Wilkens, Christoph Winkler,