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

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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. © 2008 Elsevier B.V. All rights reserved.

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Entrop, O., Scholz, H., & Wilkens, M. (2009). The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market. Journal of Banking and Finance, 33(5), 874–882. https://doi.org/10.1016/j.jbankfin.2008.09.019

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