Structured notes are complex investment products with returns linked to an underlying asset. They are often marketed based on high coupon yields, downside protection, or some combination. The payoffs of structured notes can seem like a free lunch, but banks are not selling them to you because they’re your friend. When you’re having dinner with lions you have to make sure you’re at the table, not on the menu. ------------------ Follow Ben Felix on - Twitter: https://twitter.com/benjaminwfelix Visit Rational Reminder: https://rationalreminder.ca/ Join the Rational Reminder Community: https://community.rationalreminder.ca/ Follow the Rational Reminder on: - Twitter: https://www.twitter.com/RationalRemind - Instagram: https://www.instagram.com/rationalreminder/ Visit PWL Capital: https://www.pwlcapital.com/ Follow PWL Capital on: - Twitter: https://twitter.com/PWLCapital - Facebook: https://www.facebook.com/PWLCapital - LinkedIn: https://www.linkedin.com/company/pwl-capital/ You can find the Rational Reminder podcast on Google Podcasts: https://www.google.com/podcasts?feed=aHR0cHM6Ly9yYXRpb25hbHJlbWluZGVyLmxpYnN5bi5jb20vcnNz Apple Podcasts: https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582?mt=2 Spotify Podcasts: https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=hjZNfLKuSjSeWX38GPqhVA ------------------ Sources: Cochrane, J. H. (2022). Portfolios for long-term investors. Review of Finance, 26(1), 1–42. https://doi.org/10.1093/rof/rfab038 Gabaix, X., & Laibson, D. (2006). Shrouded attributes, consumer myopia, and information suppression in competitive markets. The Quarterly Journal of Economics, 121(2), 505–540. https://doi.org/10.1162/qjec.2006.121.2.505 Carlin, B. I. (2009). Strategic price complexity in retail financial markets☆. Journal of Financial Economics, 91(3), 278–287. https://doi.org/10.1016/j.jfineco.2008.05.002 Henderson, B. J., & Pearson, N. D. (2011). The dark side of financial innovation: A case study of the pricing of a retail financial product☆. Journal of Financial Economics, 100(2), 227–247. https://doi.org/10.1016/j.jfineco.2010.12.006 Deng, G., Guedj, I., Mallett, J., & McCann, C. (2011). The anatomy of principal-protected absolutereturn barrier notes. The Journal of Derivatives, 19(2), 61–70. https://doi.org/10.3905/jod.2011.19.2.061 Bernard, C., Boyle, P. P., & Gornall, W. (2011). Locally capped investment products and the retailinvestor. The Journal of Derivatives, 18(4), 72–88. https://doi.org/10.3905/jod.2011.18.4.072 Deng, G., Dulaney, T., Husson, T., McCann, C., & Yan, M. (2015). Ex post structured-product returns: Index methodology and analysis. The Journal of Investing, 24(2), 45–58. https://doi.org/10.3905/joi.2015.24.2.045 Célérier, C., & Vallée, B. (2017). Catering to Investors Through Security Design: Headline Rate and Complexity*. The Quarterly Journal of Economics, 132(3), 1469–1508. https://doi.org/10.1093/qje/qjx007 Vokata, P. (2021). Engineering lemons. Journal of Financial Economics, 142(2), 737–755. https://doi.org/10.1016/j.jfineco.2021.04.035 Chesney, Marc and Fattinger, Felix and Krakow, Nils Jonathan and Straumann, Simon, Interest Rates, Competition, and Complexity: Demand and Supply of Retail Financial Products (May 15, 2022). Available at SSRN: https://ssrn.com/abstract=3499660 or http://dx.doi.org/10.2139/ssrn.3499660 Henderson, B. J., Pearson, N. D., & Wang, L. (2020). Pre-trade hedging: Evidence from the issuance of retail structured products. Journal of Financial Economics, 137(1), 108–128. https://doi.org/10.1016/j.jfineco.2020.02.004 Ammann, M., Arnold, M., & Straumann, S. (2023). Pricing, issuance volume, and design of innovative securities: The role of investor information. Journal of Financial Intermediation, 55, 101041. https://doi.org/10.1016/j.jfi.2023.101041 Goetzmann, W., Kim, D., & Shiller, R. (2016). Crash beliefs from investor surveys (No. w22143; p. w22143). National Bureau of Economic Research. https://doi.org/10.3386/w22143 Henderson, B. J., Pearson, N. D., & Wang, L. (2023). Retail derivatives and sentiment: A sentiment measure constructed from issuances of retail structured equity products. The Journal of Finance, 78(4), 2365–2407. https://doi.org/10.1111/jofi.13253 Gennaioli, N., Shleifer, A., & Vishny, R. (2012). Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics, 104(3), 452–468. https://doi.org/10.1016/j.jfineco.2011.05.005 Sec. Gov | regulators working together to serve investors. (n.d.). Retrieved July 19, 2023, from https://www.sec.gov/news/speech/regulators-working-together-serve-investors Das, S. R., & Statman, M. (2013). Options and structured products in behavioral portfolios. Journal of Economic Dynamics and Control, 37(1), 137–153. https://doi.org/10.1016/j.jedc.2012.07.004

• published: 03 Aug 2023
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