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The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market

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  • Entrop, Oliver
  • Scholz, Hendrik
  • Wilkens, Marco

Abstract

This paper presents the first analysis of open-end leverage certificates on the German market. The major innovations of these certificates are twofold. First, issuers announce a price-setting formula according to which they are willing to buy and sell the certificates over time. Second, the product's lifetime is potentially endless. Our main findings are that the price-setting formula is (i) designed to strongly favor the issuer and (ii) is consistent with the main outcome of the 'life cycle hypothesis' for structured financial products [Stoimenov, P.A., Wilkens, S., 2005. Are structured products 'fairly' priced? An analysis of the German market for equity-linked instruments. Journal of Banking and Finance 29, 2971-2993]. (iii) This holds for different product features and also in the presence of issuers' credit risk and jump risk in the underlying.

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  • Entrop, Oliver & Scholz, Hendrik & Wilkens, Marco, 2009. "The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 874-882, May.
    • Handle: RePEc:eee:jbfina:v:33:y:2009:i:5:p:874-882
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    Cited by:

    1. Baller, Stefanie & Entrop, Oliver & Schober, Alexander & Wilkens, Marco, 2017. "What drives performance in the speculative market of short-term exchange-traded retail products?," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-26-17, University of Passau, Faculty of Business and Economics.
    2. Baller, Stefanie, 2017. "Risk taking in the market of speculative exchange-traded retail products: Do socio-economic factors matter?," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-27-17, University of Passau, Faculty of Business and Economics.
    3. Schertler, Andrea, 2021. "Listing of classical options and the pricing of discount certificates," Journal of Banking & Finance, Elsevier, vol. 123(C).
    4. Rossetto, Silvia & Bommel, Jos van, 2009. "Endless leverage certificates," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1543-1553, August.
    5. Breuer, Wolfgang & Hauten, Guido & Kreuz, Claudia, 2009. "Financial instruments with sports betting components: Marketing gimmick or a domain for behavioral finance?," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2241-2252, December.
    6. Entrop, Oliver & Fischer, Georg, 2019. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-34-19, University of Passau, Faculty of Business and Economics.
    7. Schertler, Andrea, 2016. "Pricing effects when competitors arrive: The case of discount certificates in Germany," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 84-99.
    8. Rodrigo Hernández & Wayne Lee & Pu Liu & Tian-Shyr Dai, 2013. "Outperformance Certificates: analysis, pricing, interpretation, and performance," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 691-713, May.
    9. Baule, Rainer, 2011. "The order flow of discount certificates and issuer pricing behavior," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3120-3133, November.
    10. Baller, Stefanie & Entrop, Oliver & McKenzie, Michael & Wilkens, Marco, 2016. "Market makers’ optimal price-setting policy for exchange-traded certificates," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 206-226.
    11. Ally Quan Zhang & Matthias Thul, 2017. "How much is the gap?—Efficient jump risk-adjusted valuation of leveraged certificates," Quantitative Finance, Taylor & Francis Journals, vol. 17(9), pages 1387-1401, September.

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