Neglected Risk in Financial Innovation: Evidence from Structured Product Counterparty Exposure
Journal
European Financial Management
Series
School of Finance Working Paper Series
Type
journal article
Date Issued
2021-03
Author(s)
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.
Language
English
Keywords
Structured products
counterparty risk
risk attention
HSG Classification
contribution to scientific community
Refereed
No
Publisher
SoF - HSG
Publisher place
St. Gallen
Volume
27
Number
2
Start page
287
End page
325
Subject(s)
Eprints ID
230730
File(s)![Thumbnail Image]()
Name
14_06_Arnold et al_Neglected Risk.pdf
Size
555.96 KB
Format
Adobe PDF
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