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Behavioral financial engineering in the fixed-income market: The influence of the coupon structure

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  • Eickholt, Mathias

Abstract

In this paper we investigate the influence of coupon structure on the financial behavior of Individual Investors in the fixed-income market. Examining circa 26 million decisions on 204 standard putable bonds with different coupon offerings our major findings are: (i) Products with a flat coupon structure and a high duration attract fewer investors and are significantly more often exercised early, whereas financially equal products with a steeply rising coupon structure arouse more interest among investors and are less often redeemed early. (ii) The shape of the upcoming coupon structure is an important basis on which investors decide which putable bond in a portfolio to exercise early. (iii) Issuers who exploit empirical patterns related to a bond´s coupon structure through "behavioral financial engineering" can benefit from a lower liquidity demand and a diminishing empirical option value.

Suggested Citation

  • Eickholt, Mathias, 2014. "Behavioral financial engineering in the fixed-income market: The influence of the coupon structure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 16, University of Passau, Faculty of Business and Economics.
    • Handle: RePEc:zbw:upadbr:16
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    References listed on IDEAS

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    More about this item

    Keywords

    individual investors; product design; putable bond;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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