The Complexity and Returns of Structured Products

Abstract: In this paper we analyze if higher complexity gives lower returns in structured products. Our unique, hand collected sample consists of 499 structured products sold in Sweden that matured or were subject to early redemption during 2016. We assign a complexity score to each product based on the conditions of their payo pro les. Our sample consists of products with complexity scores 1 through 4 out of a possible 1 to 8. We perform two regressions. In a panel regression, we regress monthly returns on complexity score and nd that products of complexity score 3 earn a statistically signi cant -0.5% lower monthly returns than products of complexity 1. In the second regression, we use monthly returns that are risk-adjusted using a market factor model. The results from this regression show that products of complexity 4 and 3 perform worse than products of complexity 1 by -0.5% and -0.1%, respectively. Complexity 2 performs better by approximately 0.1%. Our results con rm what previous literature has found; that very complex structured products are di cult to value and that higher complexity can be used to hide risks and fees.