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  • August 2017
  • Article
  • Quarterly Journal of Economics

Catering to Investors Through Security Design: Headline Rate and Complexity

By: Claire Célérier and Boris Vallée
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Abstract

This paper investigates the rationale for issuing complex securities to retail investors. We focus on a large market of investment products targeted exclusively at households: retail-structured products in Europe. We hypothesize that banks strategically use product complexity to cater to yield-seeking households by making product returns more salient and shrouding risk. We find four empirical results consistent with this view. First, we show that structured products with complex payoff formulas offer higher headline rates, and that they more frequently expose investors to a complete loss of their investment. We then document that banks are more inclined to issue high-headline-rate and more complex products in low-rate environments. Finally, we find that high-headline-rate and more complex products are more profitable for banks, and that their ex post performance is lower.

Keywords

Financial Complexity; Catering; Shrouding; Reaching For Yield; Investment

Citation

Célérier, Claire, and Boris Vallée. "Catering to Investors Through Security Design: Headline Rate and Complexity." Quarterly Journal of Economics 132, no. 3 (August 2017): 1469–1508.
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About The Author

Boris Vallee

Finance
→More Publications

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    • 2021
    • Faculty Research

    The Effects of Local Government Financial Distress: Evidence from Toxic Loans

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    • 2021
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    FinTech Lending and Cashless Payments

    By: Boris Vallée, Pulak Ghosh and Yao Zeng
    • October 2020
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    A Case in Point: Shared Home Equity

    By: Daniel Green, Boris Vallee, Sid Beaumaster and Yang (Dolly) Yu
More from the Authors
  • The Effects of Local Government Financial Distress: Evidence from Toxic Loans By: Boris Vallée and Julien Sauvagnat
  • FinTech Lending and Cashless Payments By: Boris Vallée, Pulak Ghosh and Yao Zeng
  • A Case in Point: Shared Home Equity By: Daniel Green, Boris Vallee, Sid Beaumaster and Yang (Dolly) Yu
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