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Engineering lemons

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  • Vokata, Petra

Abstract

Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: Financial innovation benefits its adopters. In my 2006–2015 sample of over 28,000 yield enhancement products (YEP), the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees. On average, YEPs charge 6–7% in annual fees and subsequently lose 6–7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often statewise dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

Suggested Citation

  • Vokata, Petra, 2021. "Engineering lemons," Journal of Financial Economics, Elsevier, vol. 142(2), pages 737-755.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:737-755
    DOI: 10.1016/j.jfineco.2021.04.035
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    More about this item

    Keywords

    Household finance; Financial innovation; Hidden costs; Complexity; Structured products;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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