Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market

Xindan Li; Avanidhar  Subrahmanyam; Xuewei Yang

doi:10.1016/j.jfineco.2018.01.010

Author(s)

Xindan Li
Avanidhar Subrahmanyam
Xuewei Yang

Detail(s)

Original language	English
Pages (from-to)	38-65
Journal / Publication	Journal of Financial Economics
Volume	128
Issue number	1
Online published	9 Feb 2018
Publication status	Published - Apr 2018
Externally published	Yes

Link(s)

DOI	DOI https://doi.org/10.1016/j.jfineco.2018.01.010 Final Published version
	Check@CityULib
Link to Scopus	https://www.scopus.com/record/display.uri?eid=2-s2.0-85041520866&origin=recordpage
Permanent Link	https://scholars.cityu.edu.hk/en/publications/publication(e4d13082-4a55-4efd-a836-5990ddf2681f).html

Abstract

We examine the notion that financial products which cater to investors’ behavioral biases can yield high trading activity and thus be profitable for issuers. Our setting considers options with a callback feature, namely, callable bull/bear contracts (CBBCs). Such contracts have high skewness when close to callback and thus appeal to cumulative prospect theory preferences. CBBCs with high skewness earn negative average returns, and issuers’ gross profits vary positively with CBBC skewness. Over the 2009–2014 period, issuers earn gross profits of about $1.67 billion by trading CBBCs on the Hang Seng Index. These findings highlight the role of behavioral finance in financial innovation.

Research Area(s)

Lotteries, Gambling, Financial innovation, Cumulative prospect theory, Callable bull/bear contract (CBBC)

Citation Format(s)

[ RIS ] [ BibTeX ]

Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market. / Li, Xindan; Subrahmanyam, Avanidhar ; Yang, Xuewei.

In: Journal of Financial Economics, Vol. 128, No. 1, 04.2018, p. 38-65.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review

Li, X, Subrahmanyam, A & Yang, X 2018, 'Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market', Journal of Financial Economics, vol. 128, no. 1, pp. 38-65. https://doi.org/10.1016/j.jfineco.2018.01.010

Li, X., Subrahmanyam, A., & Yang, X. (2018). Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market. Journal of Financial Economics, 128(1), 38-65. https://doi.org/10.1016/j.jfineco.2018.01.010

Li X, Subrahmanyam A, Yang X. Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market. Journal of Financial Economics. 2018 Apr;128(1):38-65. Epub 2018 Feb 9. doi: 10.1016/j.jfineco.2018.01.010

Li, Xindan ; Subrahmanyam, Avanidhar ; Yang, Xuewei. / Can financial innovation succeed by catering to behavioral preferences? Evidence from a callable options market. In: Journal of Financial Economics. 2018 ; Vol. 128, No. 1. pp. 38-65.