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Abstract "This paper investigates why financial institutions issue complex securities. We focus on a large market of investment products targeted exclusively at households: retail structured products. We develop three measures of their complexity via a text analysis of the term sheets of all 55,000 retail structured products issued in Europe between 2002 and 2010. We find that the complexity of structured products has significantly increased over this period, as well as product differentiation. Building on the theories of strategic obfuscation and salience, we then hypothesize that banks use complexity to cater to yield seeking or myopic investors, while increasing their own profits. We find three types of empirical evidence consistent with this view. First, we show that more complex products offer higher promised returns. Second, calculating the fair value of a subsample of products, we find that more complex products are more profitable for issuers, and that their ex post performance is lower. Finally, banks issue more complex products in environments in which promised returns are likely to be more salient."

Additional Nematrian Commentary This paper won the ESRB's Ieke van den Burg Prize for Research on Systemic Risk in 2015.

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