Can Financial Innovation Solve Household Reluctance to Take Risk?

by Laurent Calvet, Claire Celerier, Paolo Sodini, and Boris Vallée

Overview — Structured products are an innovative class of retail financial products with option-like features. This paper provides empirical evidence suggesting that innovative financial products like these can help alleviate loss aversion and thus the low participation of households in risky asset markets.

Author Abstract

Using a large administrative panel of Swedish households, we document the fast and broad adoption of retail structured products, an innovative class of contracts offering non-linear exposures to equity markets. Households investing in structured products differ from traditional stock market participants on key characteristics and significantly increase their equity exposures over the sample period. The introduction of retail structured products thereby raises both the likelihood and the extent of stock market participation, especially for households with lower wealth and IQ and of older age. The design of purchased products varies strongly with household characteristics, suggesting the importance of heterogeneity in preferences and financial circumstances. A simple portfolio choice model shows that household loss aversion best explains the demand for structured products and the empirical facts we observe. Our results illustrate how financial innovation can mitigate investor behavioral biases.