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Asset Complexity and the Return Gap

Author

Listed:
  • Pengjie Gao
  • Allen Hu
  • Peter Kelly
  • Cameron Peng
  • Ning Zhu

Abstract

Existing research finds that investors’ returns vary with their wealth and level of sophistication. We bring a new perspective from the supply side by showing that return heterogeneity can be magnified as assets offered by the market become more complex. Using detailed account-level data, we examine the trading of B funds—complex, structured products in the Chinese market. During a 3-year market cycle, the return gap between the naive and sophisticated is an order-of-magnitude greater when trading B funds than when trading simple, non-structured funds. In an event study, we confirm that this disparity is driven by differences in investors’ understanding of product complexity.

Suggested Citation

  • Pengjie Gao & Allen Hu & Peter Kelly & Cameron Peng & Ning Zhu, 2024. "Asset Complexity and the Return Gap," Review of Finance, European Finance Association, vol. 28(2), pages 511-550.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:2:p:511-550.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad027
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    More about this item

    Keywords

    Complexity; return gap; wealth inequality;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • G5 - Financial Economics - - Household Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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