IDEAS home Printed from https://ideas.repec.org/p/zbw/upadbr/b2617.html
   My bibliography  Save this paper

What drives performance in the speculative market of short-term exchange-traded retail products?

Author

Listed:
  • Baller, Stefanie
  • Entrop, Oliver
  • Schober, Alexander
  • Wilkens, Marco

Abstract

This paper considers the realized returns of individual investors in warrants and leverage certificates. First, we derive a general formula that analytically decomposes the return into several economically meaningful components that are related to investor's trading behavior and the issuers' price-setting strategy. Second, we use a large trade dataset to analyze returns along these components and also link them to investors' risk taking strategy. Our main findings are threefold: (i) The overall performance is poor. (ii) Investors show neutral timing skills, while the main performance driver is the issuers' price-setting. (iii) Higher risk taking by investors diminishes the performance further. Our results imply that retail investors do not achieve a pecuniary benefit from the considered financial innovations.

Suggested Citation

  • Baller, Stefanie & Entrop, Oliver & Schober, Alexander & Wilkens, Marco, 2017. "What drives performance in the speculative market of short-term exchange-traded retail products?," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-26-17, University of Passau, Faculty of Business and Economics.
  • Handle: RePEc:zbw:upadbr:b2617
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/179475/1/1023390434.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dorn, Daniel, 2010. "Investors with too many options?," Working Paper Series 1197, European Central Bank.
    2. Oliver Entrop & Michael McKenzie & Marco Wilkens & Christoph Winkler, 2016. "The performance of individual investors in structured financial products," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 569-604, April.
    3. Baller, Stefanie & Entrop, Oliver & McKenzie, Michael & Wilkens, Marco, 2016. "Market makers’ optimal price-setting policy for exchange-traded certificates," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 206-226.
    4. Lei Feng & Mark Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, Springer, vol. 9(3), pages 305-351, September.
    5. Stoimenov, Pavel A. & Wilkens, Sascha, 2005. "Are structured products 'fairly' priced? An analysis of the German market for equity-linked instruments," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2971-2993, December.
    6. Entrop, Oliver & Scholz, Hendrik & Wilkens, Marco, 2009. "The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 874-882, May.
    7. Thorsten Hens & Marc Oliver Rieger, 2014. "Can utility optimization explain the demand for structured investment products?," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 673-681, April.
    8. Brad M. Barber & Terrance Odean, 2001. "The Internet and the Investor," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 41-54, Winter.
    9. Marta Szymanowska & Jenke Ter Horst & Chris Veld, 2009. "Reverse convertible bonds analyzed," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(10), pages 895-919, October.
    10. Josef Lakonishok & Inmoo Lee & Neil D. Pearson & Allen M. Poteshman, 2007. "Option Market Activity," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 813-857.
    11. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    12. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    13. Stephan Meyer & Sebastian Schroff & Christof Weinhardt, 2014. "(Un)skilled leveraged trading of retail investors," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(2), pages 111-138, May.
    14. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    15. Lei Feng & Mark S. Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, European Finance Association, vol. 9(3), pages 305-351.
    16. Das, Sanjiv R. & Statman, Meir, 2013. "Options and structured products in behavioral portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 137-153.
    17. Breuer, Wolfgang & Perst, Achim, 2007. "Retail banking and behavioral financial engineering: The case of structured products," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 827-844, March.
    18. Henderson, Brian J. & Pearson, Neil D., 2011. "The dark side of financial innovation: A case study of the pricing of a retail financial product," Journal of Financial Economics, Elsevier, vol. 100(2), pages 227-247, May.
    19. Bauer, Rob & Cosemans, Mathijs & Eichholtz, Piet, 2009. "Option trading and individual investor performance," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 731-746, April.
    20. Wilkens, Sascha & Stoimenov, Pavel A., 2007. "The pricing of leverage products: An empirical investigation of the German market for `long' and `short' stock index certificates," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 735-750, March.
    21. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
    22. Amit Seru & Tyler Shumway & Noah Stoffman, 2010. "Learning by Trading," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 705-739, February.
    23. Christine Brown & Jonathan Dark & Kevin Davis, 2010. "Exchange traded contracts for difference: Design, pricing, and effects," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(12), pages 1108-1149, December.
    24. Rainer Baule & Philip Blonski, 2015. "The Demand for Warrants and Issuer Pricing Strategies," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(12), pages 1195-1219, December.
    25. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    26. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
    27. Hentschel, Ludger, 2003. "Errors in Implied Volatility Estimation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 779-810, December.
    28. Rainer Baule & Oliver Entrop & Marco Wilkens, 2008. "Credit risk and bank margins in structured financial products: Evidence from the German secondary market for discount certificates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(4), pages 376-397, April.
    29. Andreas Grünbichler & Hanspeter Wohlwend, 2005. "The Valuation of Structured Products: Empirical Findings for the Swiss Market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(4), pages 361-380, December.
    30. Rossetto, Silvia & Bommel, Jos van, 2009. "Endless leverage certificates," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1543-1553, August.
    31. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    32. Entrop, Oliver & Fischer, Georg & McKenzie, Michael & Wilkens, Marco & Winkler, Christoph, 2016. "How does pricing affect investors’ product choice? Evidence from the market for discount certificates," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 195-215.
    33. Jenke ter Horst & Chris Veld, 2008. "An Empirical Analysis of the Pricing of Bank Issued Options versus Options Exchange Options," European Financial Management, European Financial Management Association, vol. 14(2), pages 288-314, March.
    34. Daniel Dorn & Paul Sengmueller, 2009. "Trading as Entertainment?," Management Science, INFORMS, vol. 55(4), pages 591-603, April.
    35. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, August.
    36. Shefrin, Hersh & Statman, Meir, 1985. "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    37. Benet, Bruce A. & Giannetti, Antoine & Pissaris, Seema, 2006. "Gains from structured product markets: The case of reverse-exchangeable securities (RES)," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 111-132, January.
    38. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    39. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Farkas, Miklós & Váradi, Kata, 2021. "Do leveraged warrants prompt individuals to speculate on stock price reversals?," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 164-176.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Baller, Stefanie & Entrop, Oliver & McKenzie, Michael & Wilkens, Marco, 2016. "Market makers’ optimal price-setting policy for exchange-traded certificates," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 206-226.
    2. Oliver Entrop & Georg Fischer, 2020. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1049-1071, July.
    3. Baller, Stefanie, 2017. "Risk taking in the market of speculative exchange-traded retail products: Do socio-economic factors matter?," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-27-17, University of Passau, Faculty of Business and Economics.
    4. Schertler, Andrea, 2016. "Pricing effects when competitors arrive: The case of discount certificates in Germany," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 84-99.
    5. Entrop, Oliver & Fischer, Georg, 2019. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-34-19, University of Passau, Faculty of Business and Economics.
    6. Schertler, Andrea, 2021. "Listing of classical options and the pricing of discount certificates," Journal of Banking & Finance, Elsevier, vol. 123(C).
    7. Oliver Entrop & Michael McKenzie & Marco Wilkens & Christoph Winkler, 2016. "The performance of individual investors in structured financial products," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 569-604, April.
    8. Chen, Rongda & Zhou, Hanxian & Jin, Chenglu & Liu, Jia, 2020. "Discount or premium? Pricing of structured products: An analysis of Chinese market," International Review of Financial Analysis, Elsevier, vol. 70(C).
    9. Matthias Pelster & Andrea Schertler, 2019. "Pricing and issuance dependencies in structured financial product portfolios," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 342-365, March.
    10. Farkas, Miklós & Váradi, Kata, 2021. "Do leveraged warrants prompt individuals to speculate on stock price reversals?," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 164-176.
    11. Baule, Rainer & Münchhalfen, Patrick & Shkel, David & Tallau, Christian, 2023. "Fair-washing in the market for structured retail products? Voluntary self-regulation versus government regulation," Journal of Banking & Finance, Elsevier, vol. 148(C).
    12. Henderson, Brian J. & Pearson, Neil D. & Wang, Li, 2020. "Pre-trade hedging: Evidence from the issuance of retail structured products," Journal of Financial Economics, Elsevier, vol. 137(1), pages 108-128.
    13. da Silva, Paulo Pereira & Mendes, Victor, 2021. "Exchange-traded certificates, education and the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    14. Ammann, Manuel & Arnold, Marc & Straumann, Simon, 2017. "Illuminating the Dark Side of Financial Innovation: The Role of Investor Information," Working Papers on Finance 1704, University of St. Gallen, School of Finance.
    15. H. Fink & S. Geissel & J. Sass & F. T. Seifried, 2019. "Implied risk aversion: an alternative rating system for retail structured products," Review of Derivatives Research, Springer, vol. 22(3), pages 357-387, October.
    16. Baule, Rainer, 2011. "The order flow of discount certificates and issuer pricing behavior," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3120-3133, November.
    17. Entrop, Oliver & Fischer, Georg & McKenzie, Michael & Wilkens, Marco & Winkler, Christoph, 2016. "How does pricing affect investors’ product choice? Evidence from the market for discount certificates," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 195-215.
    18. Thorsten Hens & Marc Oliver Rieger, 2014. "Can utility optimization explain the demand for structured investment products?," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 673-681, April.
    19. Bobriková Martina & Harčariková Monika, 2015. "Reverse Bonus Certificate Design and Valuation Using Pricing by Duplication Methods," Scientific Annals of Economics and Business, Sciendo, vol. 62(3), pages 277-289, November.
    20. Kunz, Alexis H. & Messner, Claude & Wallmeier, Martin, 2017. "Investors’ risk perceptions of structured financial products with worst-of payout characteristics," Journal of Behavioral and Experimental Finance, Elsevier, vol. 15(C), pages 66-73.

    More about this item

    Keywords

    Leverage Certificate; Warrant; Financial Innovation; Retail Investor; Performance;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:upadbr:b2617. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/fwpasde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.