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Contribution Details
| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Interest Rates, Bounded Rationality, and Complexity: Demand and Supply of Retail Financial Products |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | SSRN |
| Number | 3499660 |
| ISSN | 1556-5068 |
| Number of Pages | 88 |
| Date | 2022 |
| Abstract Text | We study the post-Great Recession market for retail investment products. With an experiment, we show that low interest rates drive investment demand but not product differentiation. Elicited margins go hand in hand with investors' underestimation of complex risk exposures. We empirically document that (i) rising complexity follows market growth, (ii) issuer margins increase in complexity, and (iii) simpler products first-order dominate more-complex products. Furthermore, biased dependency perceptions predict margins in the cross-section. Consistent with limited buy-side learning and growing sell-side competition, banks employ strategic price complexity to mitigate competitive pressure. Our findings showcase how low interest rates fuel excessive risk-taking. |
| Free access at | DOI |
| Digital Object Identifier | 10.2139/ssrn.3499660 |
| Other Identification Number | merlin-id:21528 |
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