The Pricing of Structured Products in the Swiss Market

Burth, Stefan; Kraus, Thomas; Wohlwend, Hanspeter

doi:10.3905/jod.2001.319173

Cited by 81 publications

(51 citation statements)

References 8 publications

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“…Compared to theoretical values, we obtain an average overpricing of at least 3.4%. This is much higher than the average overpricing of 1.91% for simple reverse convertibles found in the Swiss market by Burth et al (2001). Thus, greater complexity appears to entail higher premia, which is in line with expectations since complex products are more costly to hedge.…”

Section: Resultssupporting

confidence: 63%

“…Analyzing 199 reverse convertibles and 76 discount certificates on Swiss blue chips outstanding in August 1999, Burth et al (2001) find a significant average overpricing of 1.91% in the primary market. Prices in the secondary market are also above theoretical values, as Wilkens et al (2003) show for a sample of 169 reverse convertibles and 737 discount certificates over 22 trading days in November 2001.…”

Section: Literature Reviewmentioning

confidence: 99%

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Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Wallmeier

Diethelm

2009

JOD

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The market for structured financial products in Switzerland ranks among the largest in the world. A unique characteristic of the Swiss market is that its most successful products are reverse convertibles on multiple assets with conditional capital protection (multiple barrier reverse convertibles, MBRC). In other countries, an active market only exists for simpler types of reverse convertibles. The valuation of MBRCs is not straightforward, and pricing tools are not yet publicly available. Thus, transparency with respect to fair values might be poor, and it is not obvious that the competition between issuers is strong enough to ensure "fair" pricing. We provide the first empirical study on market pricing of MBRCs based on a comprehensive database of 468 certificates outstanding in April 2007. Using a numerical, tree-based valuation method, we obtain an average overpricing of at least 3.4%. This premium on the entire product corresponds to a price discount of 29% on the embedded short put. The overpricing is positively related to the coupon level, indicating that investors tend to overweight the sure coupon and underestimate the risk involved. This behavioral bias appears to be important in explaining the success of the product.

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Section: Resultssupporting

confidence: 63%

Section: Literature Reviewmentioning

confidence: 99%

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Wallmeier

Diethelm

2009

JOD

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“…They use the default-free theoretical value as a reference and compare it with prices quoted by the banks. The same holds for Wasserfallen and Schenk (1996) and Burth, Kraus, and Wohlwend (2001) in their analysis of capital-guaranteed products and reverse convertibles and discount certificates, respectively, in the Swiss market. Wilkens, Erner, and Röder (2003) are the first to consider credit risk when investigating the quotes of reverse convertibles and discount certificates in the German market.…”

Section: Journal Of Futures Markets Doi: 101002/futmentioning

confidence: 96%

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

Baule

Entrop

Wilkens

2008

Journal of Futures Markets

109

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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

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“…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).…”

Section: Introductionmentioning

confidence: 99%

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

Baller

Entrop

McKenzie

et al. 2016

Journal of Banking & Finance

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This paper considers the pricing of certificates on exchanges for retail investors. The contribution to the literature is twofold: (i) We provide the first theoretical model that analyzes the optimal, i.e. profit-maximizing price-setting policy of the issuer over a certificate's life time. Our model derives and examines the nexus between optimal markup and optimal spread inter-temporally set by the issuer, unhedgeable risk faced by the issuer, and investors' buying and selling decisions. (ii) Analyzing the German market for leverage certificates, we provide the first comprehensive empirical analysis of model-derived hypotheses on the issuers' pricing policies that accounts for possible endogeneity between markup and spread and concretizes the effects of unhedgeable risk, volume and order flow.

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The Pricing of Structured Products in the Swiss Market

Cited by 81 publications

References 8 publications

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

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

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

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