How structured products distort equity volatilities and yields

Do retail structured products distort equity volatilities?: 

In this paper, the author investigates how the hedging activity of structured products affects equity volatilities, contributing to the structured products literature and examining the influence of option supply/ demand on volatility. Prior research highlights behavioral factors behind structured products’ appeal, yet the market implications of their hedging activities remain underexplored. The author presents a model illustrating the impact of structured products’ net gamma on spot dynamics and implied volatilities, validated through empirical analysis of structured products and option data.
Findings indicate that the most popular US equities amongst retail investors have lower volatilities, suggesting these hedging activities influence options market price formation. The author proposes a trading strategy exploiting this distortion and demonstrates its profitability.

Structured products and equity yields: In this paper, the author investigates how the hedging activity of structured products affects dividends and equity yields, contributing to the structured products literature and examining the influence of those products' supply/demand on yields. Utilizing a comprehensive dataset of structured products and dividend futures, the author's research shows that while dividend supply is primarily concentrated in maturities under 5 years, its effects are significant for longer maturities (6-9 years). Adapting the Vayanos and Vila (2021) model to the equity market, the author develops a two-factor model accounting for both dividend growth and supply risks. Empirical analysis and model calibration reveal that supply-side dynamics have a pronounced impact on the term structure of equity yields, particularly during market stress periods.