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Outperformance Certificates: analysis, pricing, interpretation, and performance

Author

Listed:
  • Rodrigo Hernández
  • Wayne Lee
  • Pu Liu
  • Tian-Shyr Dai

Abstract

In this paper we introduce a new financial product named Outperformance Certificates. We study the €43 billion sample by examining 1,507 issues of the certificates outstanding in August 2005 issued by banks in Europe. We present formulas to price the certificates and empirically examine the profits in the primary market for issuing the certificates. We find that issuance of the certificates is profitable for the issuers in our sample. Issuers sell the certificate at prices 3–5 % above the fair value based upon the components of the underlying assets. We also find that the dividend yields and ex-dividend dates play an important role in the profitability of the certificates. The underlying securities tend to have high dividend yield and large market capitalization. We also find the certificates tend to mature soon after the ex-dividend dates of the underlying assets. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • 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.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:4:p:691-713
    DOI: 10.1007/s11156-012-0294-z
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    Cited by:

    1. Oliver Entrop & Michael McKenzie & Marco Wilkens & Christoph Winkler, 2016. "The performance of individual investors in structured financial products," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 569-604, April.
    2. repec:mje:mjejnl:v:12:y:2017:i:3:p:7-18 is not listed on IDEAS
    3. Martina Bobrikova & Monika Harcarikova, 2017. "Financial Engineering With Options and Its Implementation for Issuing of New Financial Innovations," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 13(3), pages 7-18.
    4. Vincent Soltes & Monika Timkova & Veronika Gicova, 2019. "New Modifications of Express Certificates on Two Assets," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 15(4), pages 113-129.
    5. 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.
    6. Rodrigo Hernandez & Yingying Shao & Pu Liu, 2017. "Leverage Certificates - A Case of Innovative Financial Engineering," Review of Economics & Finance, Better Advances Press, Canada, vol. 9, pages 71-82, August.
    7. Bobriková Martina & Harčariková Monika, 2015. "Reverse Bonus Certificate Design and Valuation Using Pricing by Duplication Methods," Scientific Annals of Economics and Business, Sciendo, vol. 62(3), pages 277-289, November.
    8. Monika HARČARIKOVÁ, 2015. "Proposal of new outperformance certificates in agricultural market," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 61(9), pages 400-409.

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    More about this item

    Keywords

    Option pricing; Structured products; Financial innovation; Outperformance Certificates; G13; G24;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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