HEC Research Papers Series,
HEC Paris

Abstract: By focusing on the highly innovative retail market for structured products, we investigate the drivers of financial complexity. We perform a lexicographic analysis of the term sheets of 55,000 retail structured products issued in Europe since 2002. We observe that financial complexity has been steadily increasing, even after the recent financial crisis, and that financial complexity is more prevalent among distributors with a less sophisticated investor base. Complex products exhibit higher markups and lower ex post performance than simpler products. Using issuance level data spanning 15 countries over the period 2002-2010, we find that financial complexity increases when competition intensifies. These findings are consistent with financial institutions strategically using complexity to mitigate competition.

Keywords: Household Finance; Financial Literacy; Complexity

JEL-codes: D12; D18; G10; I22

57 pages, November 15, 2013

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