The Impact of Greed and Experience on Investors’ Returns and Banks’ Margins: Evidence from Short-Term Exchange-Traded Retail Products

Baller, Stefanie; Entrop, Oliver; Schober, Alexander; Wilkens, Marco

doi:10.2139/ssrn.2137082

Cited by 4 publications

(3 citation statements)

References 48 publications

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“…Recent empirical findings suggest that individual investors act uninformed in this market Schroff et al, 2013) and that the issuers' pricing policy is-besides standard behavioral biases-the key reason for investors' negative returns in short-term certificates (Entrop et al, 2012) and poor risk-adjusted performance in long-term certificates (Entrop et al, 2013a). In fact, theoretical models imply that investors' demand for certificates can hardly be justified by standard preferences (Breuer and Perst, 2007;Branger and Breuer, 2008;Bernard 1 Other studies reporting overpricing include for the US Chen and Kensinger (1990); Chen and Sears (1990); Baubonis et al (1993); Benet et al (2006), for Germany Stoimenov and Wilkens (2005); Muck (2006); Wilkens and Stoimenov (2007); Baule et al (2008); Baule (2011); Baule and Tallau (2011), for Switzerland Wasserfallen and Schenk (1996); Burth et al (2001); Grünbichler and Wohlwend (2005); Wallmeier and Diethelm (2009), and for the Netherlands Szymanowska et al (2009).…”

Section: Introductionmentioning

confidence: 99%

Market makers’ optimal price-setting policy for exchange-traded certificates

Baller

Entrop

McKenzie

et al. 2016

Journal of Banking & Finance

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This paper considers the pricing of certificates on exchanges for retail investors. The contribution to the literature is twofold: (i) We provide the first theoretical model that analyzes the optimal, i.e. profit-maximizing price-setting policy of the issuer over a certificate's life time. Our model derives and examines the nexus between optimal markup and optimal spread inter-temporally set by the issuer, unhedgeable risk faced by the issuer, and investors' buying and selling decisions. (ii) Analyzing the German market for leverage certificates, we provide the first comprehensive empirical analysis of model-derived hypotheses on the issuers' pricing policies that accounts for possible endogeneity between markup and spread and concretizes the effects of unhedgeable risk, volume and order flow.

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Section: Introductionmentioning

confidence: 99%

Market makers’ optimal price-setting policy for exchange-traded certificates

Baller

Entrop

McKenzie

et al. 2016

Journal of Banking & Finance

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“…It also includes direct costs in the form of commissions which the literature has shown to be very detrimental to investors' wealth (see, e.g., Barber and Odean (2000) for equity traders and Bauer et al (2009) for option traders). Entrop et al (2012) attempt to quantify the relative impact of overpricing, bid/ask spreads and commissions on the realized returns of short term leveraged retail products. They find that direct and indirect transaction costs decrease roundtrip returns of warrants and leverage certificates by an economically large 3.5% and 4.0%, respectively.…”

Section: Introductionmentioning

confidence: 99%

The Performance of Individual Investors in Structured Financial Products

et al. 2012

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The literature often casts structured financial products in a negative light. Reasons are overpricing by issuing banks, high transaction costs and individual investors' own poor selection abilities. This paper is the first to establish the impact of each of these factors on individual investors' wealth using a large database of trades and portfolio holdings for 133,353 retail investors in discount and bonus certificates and common stocks. Our main findings are: (i) individual investors' risk-adjusted performance in certificate and in stock investments is negative, both before and after deduction of costs; (ii) their underperformance can mainly be explained by the overpricing of structured financial products and the investors' poor underlying/stock selection ability; we find evidence (iii) that certificate investors suffer from product complexity and (iv) that certificate and stock investors are prone to the disposition effect.

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“…Recent empirical findings suggest that individual investors act uninformed in this market (Meyer et al, 2013;Schroff et al, 2013) and that the issuers' pricing policy is-besides standard behavioral biases-the key reason for investors' negative returns in short-term certificates (Entrop et al, 2012) and poor risk-adjusted performance in long-term certificates (Entrop et al, 2013a). In fact, theoretical models imply that investors' demand for certificates can hardly be justified by standard preferences (Breuer and Perst, 2007;Branger and Breuer, 2008;Bernard 1 Other studies reporting overpricing include for the US Chen and Kensinger (1990); Chen and Sears (1990); Baubonis et al (1993); Benet et al (2006), for Germany Stoimenov and Wilkens (2005); Muck (2006); Wilkens and Stoimenov (2007); Baule et al (2008); Baule (2011); Baule and Tallau (2011), for Switzerland Wasserfallen and Schenk (1996); Burth et al (2001); Grünbichler and Wohlwend (2005); Wallmeier and Diethelm (2009), and for the Netherlands Szymanowska et al (2009).…”

Section: Introductionmentioning

confidence: 99%