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Neglected Risk: Evidence from Structured Product Counterparty Exposure

Author

Listed:
  • Arnold, Marc
  • Schuette, Dustin
  • Wagner, Alexander

Abstract

We show that initial offering prices of simple structured products do not reflect issuer credit risk before the Lehman default. After this event, credit risk is no longer neglected. Issuers then compensate general and even product-specific counterparty exposure. We find that investor attention toward issuer credit risk is a critical determinant of the occurrence of neglected risk. Additionally, banks have a propensity to construct products with larger counterparty exposure. Overall, our results shed light on whether and under which conditions financial engineering generates neglected risk in the economy.

Suggested Citation

  • Arnold, Marc & Schuette, Dustin & Wagner, Alexander, 2014. "Neglected Risk: Evidence from Structured Product Counterparty Exposure," Working Papers on Finance 1406, University of St. Gallen, School of Finance, revised Apr 2016.
    • Handle: RePEc:usg:sfwpfi:2014:06
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1406.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Neglected risk; structured products; counterparty risk; investor attention;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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