Endless leverage certificates
AbstractAn endless leverage certificate (ELC) is a novel retail structured product that gives its holder the right to claim the difference between the value of an underlying security and an interest accruing financing level. An ELC ceases to exist if the underlying breaches a contractual knockout level, if the holder exercises, or if she/he sells it back to the issuer. We use Monte Carlo analysis to value ELCs and find that due to limited liability, a typical ELC written on a typical DAX stock can be worth 0.3% more than its intrinsic value (the difference between the value of the underlying and the financing level). Empirically, we find that in January 2007, the 5129 ELCs issued on the thirty DAX stocks traded at an average premium of 0.67% over the intrinsic value, and that the median bid-ask spread, expressed as a percentage of the underlying, was 0.18%. For covered warrants and options this spread measure was almost twice as high. Finally, we find that upon knockout, investors received on average 3.2% less than the theoretical knockout value, which is consistent with discontinuous trading of the underlying. Overall, our findings suggest that ELCs complete the market for leverage seeking retail investors.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 33 (2009)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Financial innovation Financial derivatives Structured products;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ross, Stephen A, 1989. " Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-56, July.
- Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
- Benet, Bruce A. & Giannetti, Antoine & Pissaris, Seema, 2006. "Gains from structured product markets: The case of reverse-exchangeable securities (RES)," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 111-132, January.
- Stoimenov, Pavel A. & Wilkens, Sascha, 2005. "Are structured products 'fairly' priced? An analysis of the German market for equity-linked instruments," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2971-2993, December.
- Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 743-80.
- Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 483-503, July.
- Mark Grinblatt & Francis A. Longstaff, 2000. "Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury STRIPS Program," Journal of Finance, American Finance Association, vol. 55(3), pages 1415-1436, 06.
- Gale, Douglas, 1992. "Standard Securities," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 731-55, October.
- 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.
- Andreas Grünbichler & Hanspeter Wohlwend, 2005. "The Valuation of Structured Products: Empirical Findings for the Swiss Market," Financial Markets and Portfolio Management, Springer, vol. 19(4), pages 361-380, December.
- Herrera, Helios & Schroth, Enrique, 2011. "Advantageous innovation and imitation in the underwriting market for corporate securities," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1097-1113, May.
- Marija Corluka & Edwin O. Fischer, 2012. "Forensic Finance: Market Abuse and Price Manipulation in Security Markets on the Trail," Working Paper Series, Social and Economic Sciences 2012-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.