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Contribution Details

Type Bachelor's Thesis
Scope Discipline-based scholarship
Title The Complexity of Structured Products in Switzerland
Organization Unit
Authors
  • René Infanger
Supervisors
  • Jean-Charles Rochet
  • Nataliya Klimenko
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Date 2017
Zusammenfassung Financial product complexity is constantly increasing. Originally, the complexity is linked to financial innovation and adds depth and efficiency to financial markets. One major complex asset class that has continuously evolved during the past years is the structured product, which will be the main focus of this thesis. For retail investors, it is easy to lose track in the jungle of highly developed structured products and therefore to misjudge the risks involved. This in turn can lead to irrational and poor investment decisions. To prevent these ineffi­ciencies, a concise explanation ofthe product is required, appropriate for the sophistication of the average retail investor. I conducted a survey in Switzerland to investigate if retail investors understand structured products with the information provided by the issuers; the simplified prospectus. An easy understandability of the prospectus by the average investor is a legal requirement of the Col­lective Investment Schemes Act. The participants- all of which had investment experience ­ were asked to evaluate an Outperformance Certificate as well as a Multi Barrier Reverse Con­vertible. From the survey, four conclusions are drawn. First, the overall understanding of the two structured product types is satisfactory, but not excellent. Only around one quarter of the participants understood the two selected structured products completely. However, most participants have an accurate self-evaluation of their product understanding, even though there is a small group of investors who suffer from overconfidence bias. Secondly, I found evidence that there are investors who would buy structured products without understanding them entirely and therefore are making irrational investment decisions. Furthermore, it is evident that investors who have heard about or invested in structured products in the past have a. significantly better product understanding. The same holds true for investors with a higher educational attainment. Surprisingly, no considerable correlation between investment experience and product understanding could be found. The last key finding is that complex­ity is not always the main parameter for product understanding. An overload of technical terms and lack of visualization in the information provided by the issuers can make it harder for the average retail investor's ability to understand some of the structured products. Financial product complexity is constantly increasing. Originally, the complexity is linked to financial innovation and adds depth and efficiency to financial markets. One major complex asset class that has continuously evolved during the past years is the structured product, which will be the main focus of this thesis. For retail investors, it is easy to lose track in the jungle of highly developed structured products and therefore to misjudge the risks involved. This in turn can lead to irrational and poor investment decisions. To prevent these ineffi­ ciencies, a concise explanation ofthe product is required, appropriate for the sophistication of the average retail investor. I conducted a survey in Switzerland to investigate if retail investors understand structured products with the information provided by the issuers; the simplified prospectus. An easy understandability of the prospectus by the average investor is a legal requirement of the Col­ lective Investment Schemes Act. The participants- all of which had investment experience ­ were asked to evaluate an Outperformance Certificate as well as a Multi Barrier Reverse Con­ vertible. From the survey, four conclusions are drawn. First, the overall understanding of the two structured product types is satisfactory, but not excellent . Only around one quarter of the participants understood the two selected structured products completely. However, most participants have an accurate self-evaluation of their product understanding, even though there is a small group of investors who suffer from overconfidence bias. Secondly, I found evidence that there are investors who would buy structured products without understanding them entirely and therefore are making irrational investment decisions. Furthermore, it is evident that investors who have heard about or invested in structured products in the past have a. significantly better product understanding. The same holds true for investors with a higher educational attainment. Surprisingly, no considerable correlation between investment experience and product understanding could be found. The last key finding is that complex­ ity is not always the main parameter for product understanding. An overload of technical terms and lack of visualization in the information provided by the issuers can make it harder for the average retail investor's ability to understand some of the structured products.
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