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| Author: | Henderson, B.J. Pearson, N.D. |
| Title: | The dark side of financial innovation: a case study of the pricing of a retail financial product |
| Journal: | Journal of Financial Economics
2011 : MAY, VOL. 100:2, p. 227-247 |
| Index terms: | case studies finance securities valuation arbitrage pricing |
| Freeterms: | structured investment vehicles |
| Language: | eng |
| Abstract: | The offering prices of 64 popular retail structured equity product issues were, on average, almost 8% greater than the estimates of the corresponding fair market values obtained using option pricing methods. Under reasonable assumptions considering the underlying stocks' expected returns, the average expected return estimate on the structured products falls slightly below zero. The products do not give tax, liquidity, or other benefits, and their purchase is difficult to rationalize by informed rational investors. The findings are, however, consistent with the recent hypothesis of issuing firms' shrouding of some aspects of innovative securities or introducing complexity to exploit less informed investors. |
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