How does pricing affect investors' product choice? Evidence from the market for discount certificates

Oliver Entrop, Georg Fischer, Michael McKenzie, Marco Wilkens*, Christoph Winkler

*Corresponding author for this work

Research output: Contribution to journalArticle

6 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)195-215
Number of pages21
JournalJournal of Banking and Finance
Volume68
DOIs
Publication statusPublished - 1 Jul 2016

Keywords

  • Derivatives
  • Investor behavior
  • Product pricing
  • Structured products

Fingerprint Dive into the research topics of 'How does pricing affect investors' product choice? Evidence from the market for discount certificates'. Together they form a unique fingerprint.

  • Cite this