Pricing and issuance dependencies in structured financial product portfolios

Abstract

We exploit a unique sample of structured financial products (SFPs) to analyze pricing and issuance dependencies among different types of such market‐linked investment vehicles. Our study provides evidence of cross‐pricing between products with complementary payoff profiles. Such dependencies may be explained by issuers’ efforts to generate order flow for products that supplement their current SFP risk exposure. Additionally, we observe issuance patterns in line with the argument that issuers exploit the complementarity payout profiles when bringing SFPs to market. Our study emphasizes cross‐pricing from a perspective not previously considered in the literature.

Neglected Risk in Financial Innovation: Evidence from Structured Product Counterparty Exposure

“…Third, we carefully control for the relevant factors that may influence . Thus, we include the standard controls for margins such as proxies of market liquidity, market frictions, hedging costs, competition, and structured product demand (see, e.g., Baule, 2011; Henderson & Pearson, 2011; Pelster & Schertler, 2018). We also incorporate additional intuitive controls in the robustness checks in Section 3.6.…”

“…Baule (2011) show that the product order flow affects issuers' pricing behaviour. Pelster and Schertler (2018) argue that issuers try to generate new order flow so as to complement the payoff profiles of their outstanding products and find that issuers exploit this complementarity. Henderson and Pearson (forthcoming) show that issuers use pre‐trade hedging to influence the underlying stock prices of structured products to the disadvantage of investors.…”

Credit risk in derivative securities: A simplified approach

“…Retail derivatives have attracted increasing interest, both in practice and in the academic literature, over the past two decades. Numerous studies have focused on the pricing of such products, for example, Henderson and Pearson (2011) and Egan (2019) for the U.S. market, Schertler (2016) and Pelster and Schertler (2019) for the German market, Wallmeier and Diethelm (2009) for the Swiss market, and Célérier and Vallée (2017) for several European markets. The goal of this paper is to provide a simple model to account for credit risk in the pricing of derivative products.…”

“…Interestingly, while many subsequent papers acknowledge their work, they continue to use the simple model of Hull and White. Papers that cite the Baule et al (2008) paper, but nonetheless use the Hull and White (1995) approach, include Baule (2011), Baule and Tallau (2011), Baule and Blonski (2015), Entrop et al (2016), Schertler (2016), Schertler and Stoerch (2015), Schertler and Stoerch (2018), and Pelster and Schertler (2019).…”

Hedging costs and joint determinants of premiums and spreads in structured financial products

“…We examine the individual hedging costs for each certificate over time. Alternatively, issuers might apply netting by combining different positions and hedge the entire portfolio which can also affect the price‐setting (see e.g., Pelster & Schertler, 2019). …”