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Social Costs and Benefits of Structured Products: How Should the German Regulators React to Transparency, Wealth Appropriation, Pricing and Risk in the Local Structured Products Market?

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  • Ted F. Azarmi

    (Heilbronn University, University of Tuebingen, Germany)

Abstract

This paper analyzes the structured products in the German secondary market from a regulatory and social interest point of view. It investigates the wealth appropriation and price transparency problems in this markets over-time and with the technical precision needed for a regulatory analysis. In its empirical part, this paper, in particular, increase the precision of past pioneering studies in this area. It also incorporates an algorithm for calculating the values under the normal distribution with additional precision; improves upon escrowed dividend model; incorporates the dividend-yield estimates published by commercial financial data providers; and uses volatility surfaces, to improve the calculation precision of volatility input into the valuation formula. It shows that after removing the above sources of imprecision, the mispricing hypothesis cannot be rejected. This study also distinguishes between random mispricing and systematic overpricing and shows that there is a shift in the underlying estimation distribution indicating systematic overpricing to the disadvantage of the retail customer. In a final step author derived specific recommendations for German regulatory reaction to transparency and wealth appropriation problems in local structured products markets.

Suggested Citation

  • Ted F. Azarmi, 2017. "Social Costs and Benefits of Structured Products: How Should the German Regulators React to Transparency, Wealth Appropriation, Pricing and Risk in the Local Structured Products Market?," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 6(1), pages 1-4, February.
  • Handle: RePEc:ods:journl:v:6:y:2017:i:1:p:1-4
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    References listed on IDEAS

    as
    1. 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.
    2. Anatoliy G. Goncharuk, 2016. "Banking Sector Challenges in Research," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 5(1), pages 34-39, February.
    3. Mihir Dash, 2013. "A Study of the Impact of Asset-Liability Management on the Profitability of Banks in India," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 2(4), pages 230-234.
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