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Investor Behavior in the Market for Bank-issued Structured Products

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Schroff, S. (2015). Investor Behavior in the Market for Bank-issued Structured Products. Verlag Wissenschaft & Praxis. https://doi.org/10.3790/978-3-89644-696-4
Schroff, Sebastian. Investor Behavior in the Market for Bank-issued Structured Products. Verlag Wissenschaft & Praxis, 2015. Book. https://doi.org/10.3790/978-3-89644-696-4
Schroff, S (2015): Investor Behavior in the Market for Bank-issued Structured Products, Verlag Wissenschaft & Praxis, [online] https://doi.org/10.3790/978-3-89644-696-4

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Investor Behavior in the Market for Bank-issued Structured Products

Schroff, Sebastian

Studienreihe der Stiftung Kreditwirtschaft an der Universität Hohenheim, Vol. 51

(2015)

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Abstract

This work investigates the trading behavior of retail investors in the largest European market place for bank-issued structured products - the European Warrant Exchange (EUWAX). Structured products are designed to grant retail investors access to a broad range of risk-return combinations, ranging from conservative investment products to high-risk leverage products. The focus of the analysis is on the question, how retail investors react to new information and which sources are taken into account when speculating and investing.

The key finding is that retail investors actively trade on information, but their trading behavior exhibits various behavioral biases and irrational trading patterns such as herding, overconfidence as well as excessive optimism and risk-taking.

In sum, the informational efficiency of retail investor trading in structured products is limited, which underscores the demand for increased efforts by policy makers and financial institutions to improve the financial literacy of retail investors.

Table of Contents

Section Title Page Action Price
Contents 5
List of Figures 9
List of Tables 11
List of Abbreviations 13
Chapter 1: Introduction 15
1.1 Motivation 15
1.2 Research Outline 17
1.3 Structure of the Thesis 20
Chapter 2: Retail Investor Behavior 23
2.1 Noise Traders and Market Efficiency 23
2.2 Trading Motives 26
2.3 Investor Psychology 31
2.4 Welfare Evaluation 38
2.5 Do Retail Investors Move Markets? 41
Chapter 3: The Market for Bank-Issued Structured Products 47
3.1 Market Design 48
3.2 Product Design 52
3.3 Pricing and Complexity 55
Chapter 4: Data & Methodology 59
4.1 Retail Investor Trading 59
4.2 Financial Market Information 64
4.3 Methodological Approach 66
Chapter 5: Retail Investor Information Demand 69
5.1 Introduction 69
5.2 Literature Review 72
5.3 Data 74
5.3.1 Information Demand and Information Supply 74
5.3.2 Retail Investor Trading and Market Data 77
5.4 Empirical Results 81
5.4.1 Time Series Properties of Information Demand and Supply 81
5.4.2 Correlation and Causality 86
5.4.3 Trading Activity 89
5.4.4 Order Submission Strategies 92
5.4.5 Positioning 95
5.4.6 Return Predictability 98
5.5 Conclusion 99
Chapter 6: Media Sentiment and Leveraged Trading 103
6.1 Introduction 103
6.2 Literature Review 105
6.3 Data 107
6.3.1 News Data 107
6.3.2 Trading Data 113
6.4 Empirical Results 114
6.4.1 Trading Intensity around News 114
6.4.2 Order Submission Strategies around News 123
6.5 Conclusion 127
Chapter 7: Leveraged Trading and Earnings Announcements 129
7.1 Introduction 129
7.2 Data 132
7.2.1 Trading Data 132
7.2.2 Earnings Surprise and Abnormal Returns 133
7.3 Methodology 135
7.3.1 Risk Appetite 135
7.3.2 Positioning 138
7.4 Empirical Results 139
7.4.1 Trading Activity 139
7.4.2 Correlated Trading 142
7.4.3 Risk Appetite 145
7.4.4 Positioning 152
7.4.5 Predictive Capabilities 156
7.4.6 Post-event Trading 158
7.5 Conclusion 161
Chapter 8: Conclusion 163
8.1 Summary 163
8.2 Discussion 164
8.3 Outlook 166
Bibliography 169