Review of Finance Vol. 28 No. 2 2024

Asset Complexity and the Return Gap

Pengjie Gao¹; Allen H. Hu²; Peter Kelly¹; Cameron Peng³; Ning Zhu⁴

¹ University of Notre Dame, Notre Dame, IN, USA · ² Yale School of Management, New Haven, CT, USA · ³ London School of Economics and Political Science, London, UK · ⁴ Shanghai Advanced Institute of Finance Shanghai Jiao Tong University Shanghai China

Abstract

Existing research finds that investors’ returns vary with their wealth and level of sophistication. We bring a new perspective from the supply side by showing that return heterogeneity can be magnified as assets offered by the market become more complex. Using detailed account-level data, we examine the trading of B funds—complex, structured products in the Chinese market. During a 3-year market cycle, the return gap between the naive and sophisticated is an order-of-magnitude greater when trading B funds than when trading simple, non-structured funds. In an event study, we confirm that this disparity is driven by differences in investors’ understanding of product complexity.

DOI

10.1093/rof/rfad027

Volume

28

Issue

2

Pages

511-550

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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