The order flow of discount certificates and issuer pricing behavior

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

“…4 Moreover, it is often argued that it is hard for individual investors-due to limited financial literacy, especially in the case of very complex certificates-to assess the "fairness" of quoted prices as this would require to calculate fair market values. However, investors' do have a certain price sensitivity that limits the complete freedom of the issuers' price-setting power (Baule, 2011;Baule and Blonski, 2013). 5…”

“…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).…”

Do Individual Investors Consciously Speculate on Reversals? Evidence from Leveraged Warrant Trading

“…The closest to our paper in terms of the type of data used is Baule (2011) who merges quote data with transactions data in order to recover the order ow of investors.…”

“…However, Baule (2011) focuses on discount certicates and investigates how banks use anticipated order ow in setting their quotes. The German tax code is exploited for identication, which favors investments held over a year and nd that investor demand is high for products that mature just over a year.…”