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

• Published in: Journal of financial economics Vol. 128; no. 1; pp. 38 - 65
• Main Authors: Li, Xindan, Subrahmanyam, Avanidhar, Yang, Xuewei
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.04.2018; Elsevier Sequoia S.A
• Subjects: Behavior; Bias; Callable bull/bear contract (CBBC); Cumulative prospect theory; Finance; Financial innovation; Gambling; Innovations; Investors; Lotteries; Options markets; Profits; Prospect theory; Skewness; Stock market indexes; Trading; Gambling; D03; G13; G12; G23; Lotteries; Callable bull/bear contract (CBBC); Cumulative prospect theory; Financial innovation; D81

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 cl...