The dark side of financial innovation: A case study of the pricing of a retail financial product

Journal of Financial Economics

Volumn 100, Issue 2, 2011, Pages 227-247

  Henderson, Brian J ^a   Pearson, Neil D ^b  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

^b UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN   (United States)

Author keywords

Derivatives; Financial innovation; Pricing; Structured products

Indexed keywords

EID: 79952455048     PISSN: 0304405X     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jfineco.2010.12.006     Document Type: Article

References (48)

1. Allen F., Gale D. Arbitrage, short sales, and financial innovation. Econometrica 1991, 59:1041-1068.
2. Baker M., Quinn J. Corning: Convertible Preferred Stock, Harvard Business School Case Number (206018) 2005, Harvard Business Publishing, Boston, MA.
3. Barber B., Odean T. All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. Review of Financial Studies 2008, 21:785-818.
4. Barberis N., Huang M. Stocks as lotteries: the implications of probability weighting for security prices. American Economic Review 2008, 98:2066-2100.
5. Barberis N., Huang M., Thaler R. Individual preferences, monetary gambles, and stock market participation: a case for narrow framing. American Economic Review 2006, 96:1069-1090.
6. Baubonis C., Gastineau G., Purcell D. The banker's guide to equity-linked certificates of deposit. Journal of Derivatives 1993, 1:87-95.
7. Baule R., Entrop O., Wilkens M. Credit risk and bank margins in structured financial products: evidence from the German secondary market for discount certificates. Journal of Futures Markets 2008, 28:376-397.
8. Benet B., Giannetti A., Pissaris S. Gains from structured product markets: the case of reverse-exchangeable securities (res). Journal of Banking and Finance 2006, 30:111-132.
9. Bergstresser, D., 2008. The retail market for structured notes: issuance patterns and performance, 1995-2008. Unpublished working paper, Harvard Business School.
10. Bernard, C., Boyle, P., Gornall, W., 2009. Locally-capped investment products and the retail investor. Unpublished working paper, University of Waterloo.
11. Bethel J., Ferrel A. Policy issues raised by structured products. New Financial Institutions and Instruments: Opportunities and Policy Challenges 2007, 167-193. Brookings Institution Press, Washington DC. Y. Fuchita, R. Litan (Eds.).
12. Burth S., Kraus T., Wohlwend H. The pricing of structured products in the Swiss market. Journal of Derivatives 2001, 9:30-40.
13. Carlin B. Strategic price complexity in retail financial markets. Journal of Financial Economics 2009, 91:278-287.
14. Chen A., Kensinger J., Pu H. An analysis of PERCS. Journal of Financial Engineering 1994, 3:85-108.
15. Chordia T., Swaminathan B. Trading volume and cross-autocorrelations in stock returns. Journal of Finance 2000, 55:913-935.
16. Daniel K., Hirshleifer D., Subrahmanyam A. Investor psychology and security market under- and over-reactions. Journal of Finance 1998, 53:1839-1885.
17. Elul R. Welfare effects of financial innovation in incomplete market economies with several consumption goods. Journal of Economic Theory 1995, 65:43-78.
18. Fama E., French K. The cross-section of expected stock returns. Journal of Finance 1992, 47:427-465.
19. Fama E., French K. The equity premium. Journal of Finance 2002, 57:637-659.
20. Frame W., White L. Empirical studies of financial innovation: lots of talk, little action?. Journal of Economic Literature 2004, 42:116-144.
21. Gabaix X., Laibson D. Shrouded attributes, consumer myopia, and information suppression in competitive markets. Quarterly Journal of Economics 2006, 121:505-540.
22. Grinblatt M., Longstaff F. Financial innovation and the role of derivative securities: an empirical analysis of the Treasury STRIPS program. Journal of Finance 2000, 55:1415-1436.
23. Harty E. Pains and gains of PERQS and LEAPS. Risk 1992, 5:36-39.
24. Hou, K., Peng, L., Xiong, W., 2009. A tale of two anomalies: the implications of investor attention for price and earnings momentum. Unpublished working paper, Ohio State University, Baruch College, and Princeton University.
25. Hu G. Measures of implicit trading costs and buy-sell asymmetry. Journal of Financial Markets 2009, 12:418-437.
26. Jarrow R., O'Hara M. Primes and scores: an essay on market imperfections. Journal of Finance 1989, 44:1263-1287.
27. Kahneman D. Maps of bounded rationality: psychology for behavioral economics. American Economic Review 2003, 93:1449-1475.
28. Kleinbard E. U.S. federal income taxation of equity derivatives. Taxation of Equity Derivatives and Structured Products 2003, 120-182. Palgrave Macmillan, New York, NY. T. Rumble (Ed.).
29. Kyle A., Wang F. Speculation duopoly with agreement to disagree: can overconfidence survive the market test?. Journal of Finance 1997, 52:2073-2090.
30. Lakonishok J., Lee I., Pearson N., Poteshman A. Investor behavior in the options market. Review of Financial Studies 2007, 20:813-857.
31. Mason S., Merton R., Perold A., Tufano P. Cases in Financial Engineering and Tax Risk: Applied Studies of Financial Innovation 1995, Prentice Hall, Englewood Cliffs, NJ.
32. McConnell J., Schwartz E. The origin of LYONS: a case study in financial innovation. Journal of Applied Corporate Finance 1992, 4:40-47.
33. Mehra R., Prescott E. The equity premium: a puzzle. Journal of Monetary Economics 1985, 15:145-161.
34. Merton R. On the microeconomic theory of investment under uncertainty. Handbook of Mathematical Economics 1982, vol. II:601-669. North-Holland, Amsterdam.
35. Miller M. Financial innovation: the last twenty years and the next. Journal of Financial and Quantitative Analysis 1986, 21:459-471.
36. Odean T. Do investors trade too much?. American Economic Review 1999, 89:1279-1298.
37. Pratt T. You can't keep a lid on public equity derivatives; low-risk structured notes overcome regulatory roadblocks and bad press. Investment Dealers Digest 1994, 60(43):12-18.
38. Pratt T. Equity derivatives vanish and explanations multiply; but boosters insist underwritten deals will be back. Investment Dealers Digest 1995, 61(25):15.
39. Rogalski R., Seward J. Corporate issues of foreign currency exchange warrants. Journal of Financial Economics 1991, 30:347-366.
40. Ross S. Options and efficiency. Quarterly Journal of Economics 1976, 1:75-89.
41. Ross S. Institutional markets, financial marketing, and financial innovation. Journal of Finance 1989, 44:541-556.
42. Santangelo R., Tufano P. Harvard Business School Case Number (297056), Financial Engineering and Tax Risk: The Case of Times Mirror PEPS 1996, Harvard Business School Publishing, Boston.
43. Schroth E. Innovation, differentiation, and the choice of an underwritter: evidence from equity-linked securities. Review of Financial Studies 2006, 19:1041-1080.
44. Shefrin H., Statman M. Behavioral aspects of the design and marketing of financial products. Financial Management 1993, 22:123-134.
45. Szymanowska M., Horst J.T., Veld C. Reverse convertible bonds analyzed. Journal of Futures Markets 2009, 29:895-919.
46. Tufano P. Agency costs of risk management. Financial Management 1998, 27:67-77.
47. Tufano P. Financial innovation. Handbook of the Economics of Finance 2003, Volume 1a Corporate Finance:307-336. Elsevier.
48. Welch I. Views of financial economists on the equity premium and on professional controversies. Journal of Business 2000, 73:501-536.