Neglected Risk in Financial Innovation: Evidence from Structured Product Counterparty Exposure

Item Type Journal paper
Abstract

We investigate the compensation of counterparty exposure in the prices of structured products. Our analysis reveals that product issuers did not compensate retail investors for counterparty exposure before the Lehman default. Post‐Lehman, retail prices have no longer neglected this risk. We also measure retail investor attention towards issuer credit risk. For a given level of issuer credit risk, counterparty exposure is compensated more when attention is higher. Furthermore, issuers tend to construct products with larger counterparty exposure. Overall, our results shed light on the conditions under which financial engineering generates neglected risk.

Authors Arnold, Marc; Wagner, Alexander & Schuette, Dustin
Journal or Publication Title European Financial Management
Language English
Keywords Structured products, counterparty risk, risk attention
Subjects finance
HSG Classification contribution to scientific community
Refereed No
Date March 2021
Publisher SoF - HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Volume 27
Number 2
Page Range 287-325
Depositing User Prof. Dr. Marc Arnold
Date Deposited 31 Mar 2014 15:31
Last Modified 08 Apr 2021 12:19
URI: https://www.alexandria.unisg.ch/publications/230730

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Citation

Arnold, Marc; Wagner, Alexander & Schuette, Dustin (2021) Neglected Risk in Financial Innovation: Evidence from Structured Product Counterparty Exposure. European Financial Management, 27 (2). 287-325.

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https://www.alexandria.unisg.ch/id/eprint/230730
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