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The motives for financial complexity: An empirical investigation


Célérier, Claire Myriam; Vallee, Boris (2015). The motives for financial complexity: An empirical investigation. SSRN 2289890, University of Zurich.

Abstract

This paper investigates the motives for financial complexity by focusing on a large market of investment products exclusively targeted to households. We develop a robust measure of complexity by performing a text analysis of the term sheets of 55,000 retail structured products issued in 17 European countries since 2002. We first find that the complexity of structured products has significantly increased over the period 2002-2010. Second, calculating the fair value of a subsample of products, we show that relatively more complex products have higher markups. Third, the headline rate offered by a product is an increasing function of its complexity. Fourth, distributors targeting low-income investors, such as savings banks, offer relatively more complex products. Fifth, competition amplifies rather than mitigates the migration towards higher complexity. These findings are diffcult to fully reconcile with a completing market motive for financial complexity, while being more consistent with banks catering to yield seeking investors, or developing obfuscation strategies.

This paper investigates the motives for financial complexity by focusing on a large market of investment products exclusively targeted to households. We develop a robust measure of complexity by performing a text analysis of the term sheets of 55,000 retail structured products issued in 17 European countries since 2002. We first find that the complexity of structured products has significantly increased over the period 2002-2010. Second, calculating the fair value of a subsample of products, we show that relatively more complex products have higher markups. Third, the headline rate offered by a product is an increasing function of its complexity. Fourth, distributors targeting low-income investors, such as savings banks, offer relatively more complex products. Fifth, competition amplifies rather than mitigates the migration towards higher complexity. These findings are diffcult to fully reconcile with a completing market motive for financial complexity, while being more consistent with banks catering to yield seeking investors, or developing obfuscation strategies.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:9 October 2015
Deposited On:20 Feb 2015 09:33
Last Modified:05 Apr 2016 18:58
Series Name:SSRN
Free access at:Official URL. An embargo period may apply.
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2289890
Other Identification Number:merlin-id:11569
Permanent URL: https://doi.org/10.5167/uzh-107107

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