Credit risk and bank margins in structured financial products: Evidence from the German secondary market for discount certificates

Abstract

This study analyzes bank margins in the German secondary market for exchange‐traded structured financial products, with particular emphasis on the influence of banks' credit risk. A structural model allowing for the incorporation of correlation effects between market and credit risk is applied to compare quoted and fair theoretical prices. For discount certificates, as the most popular type of structured financial products in Germany, an empirical study is conducted. Compared to earlier studies, total margins are found to be rather low, whereas the portion that draws back to credit risk appears to be a material part of the total margin. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 376–397, 2008

Market makers’ optimal price-setting policy for exchange-traded certificates

“…Analogue findings are, e.g., reported by Henderson and Pearson (2011) for the US and by Hernández et al (2013) for a European sample. 1 Empirically there is evidence that issuers decrease overpricing over the certificate's life time (e.g., Stoimenov and Wilkens, 2005;Baule et al, 2008;Baule, 2011) which is commonly subsumed under "life cycle hypothesis", incorporate higher markups in more complex products (e.g., Stoimenov and Wilkens, 2005;Wilkens and Stoimenov, 2007), increase markups at the end of the day (Entrop et al, 2013b), decrease markups when competition is higher (Baule, 2011) and anticipate investors' systematic trading patterns and adjust markups accordingly (Baule, 2011), which is consistent with the "order flow hypothesis" (Wilkens et al, 2003).…”

“…In fact, theoretical models imply that investors' demand for certificates can hardly be justified by standard preferences (Breuer and Perst, 2007;Branger and Breuer, 2008;Bernard 1 Other studies reporting overpricing include for the US Chen and Kensinger (1990); Chen and Sears (1990); Baubonis et al (1993); Benet et al (2006), for Germany Stoimenov and Wilkens (2005); Muck (2006); Wilkens and Stoimenov (2007); Baule et al (2008); Baule (2011); Baule and Tallau (2011), for Switzerland Wasserfallen and Schenk (1996); Burth et al (2001); Grünbichler and Wohlwend (2005); Wallmeier and Diethelm (2009), and for the Netherlands Szymanowska et al (2009).…”

(Un)skilled leveraged trading of retail investors

“…6 Therefore, the issuer dominates the price of a product and is able to include a premium to ensure guaranteed profits for himself. Several studies have analyzed magnitude and reaction of issuers' premiums to parameters such as moneyness and time to maturity (Stoimenov and Wilkens (2005), Baule, Entrop, and Wilkens (2008)). Issuers reduce premiums over the life time of a bank-issued product, which is known as the life cycle effect.…”

Modeling autocallable structured products

“…[3][4][5][6] The call feature causes the structured product to be redeemed if the reference asset's price reaches or exceeds a predefined level (the call price) on a call date.…”