Abstract
Exchange-traded notes (ETNs) are a new form of security design that may allow for return profiles that are unique relative to close substitutes, such as exchange-traded funds (ETFs). Because ETNs have no underlying holdings or fund manager, we are able to use data on ETNs to analyze investor demand for market completeness in a setting that is free of many of the confounding characteristics that are present with other types of managed portfolios. Our results confirm that ETNs provide innovative return patterns that are not easily replicated with existing securities. We show that the extent of financial innovation offered by ETNs is a major factor determining investor demand for ETNs. While innovation is strongly associated with demand for small ETNs, the largest ETNs are more strongly associated with the linear transformation of returns that arises from the use of levered and inverse strategies.
Published Version
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