Does the Moment Timing Ability of the Issuer Exist? : Evidence in Structured Equity Products

We explore ‘information asymmetry’ problems in retail structured product markets. For reverse convertibles, which is the most popular retail structured product in Korea, we introduce a simple pricing model allowing investors who are unconscious of their lack of information regarding the transitional density of underlying asset. The model, on which we investigate empirical evidences for the issuer behavior of exploiting superior information, finds the conditions for the issuer to sell reverse convertibles at prices above fair. Using reverse convertible data that actually issued for Korean retail investors, we show that issuers tend to issue reverse convertibles more when (i) the market index is around local peak, (ii) the market volatility is around local trough, or (iii) underlying asset is overpriced relative to the market. The results, consistent with our theoretical implications, are the evidence of issuer’s timing ability therefore verifying the presence of the information asymmetry in retail structured market. It may also provide implications for understanding the popularity of retail products in a behavioral aspect.