The pricing of leverage products: An empirical investigation of the German market for ‘long’ and ‘short’ stock index certificates

Wilkens, Sascha; Stoimenov, Pavel A.

doi:10.1016/j.jbankfin.2006.04.004

Cited by 66 publications

(36 citation statements)

References 10 publications

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“…The choice of a two-period model means that investors buy structured products with the intention to hold them until maturity. This is indeed typically the case for structured investment 4 Note, however, that simple structured products in Germany or Switzerland are mispriced by less than 1%, and thus their expected return is still greater than the fixed interest rate (compare the above-mentioned studies on mispricing, e.g., Wilkens & Stoimenov (2007).) 5 SP/A theory goes back to Lopes (1987) and Lopes & Oden (1999).…”

Section: A Utility Maximization Model For Structured Productsmentioning

confidence: 96%

“…Elaborate pricing techniques have been developed for increasingly complicated structured products. In addition to this enormous technical literature, several interesting empirical studies have recently been published on the actual market prices of structured products in the US (Benet, et al 2006) and in Europe (Wilkens, et al 2003, Grünbichler & Wohlwend 2005, Stoimenov & Wilkens 2005, Szymanowska, et al 2007, Wilkens & Stoimenov 2007, Wallmeier & Diethelm 2008 . However, no comprehensive studies have yet attempted to understand which types of structured products are attractive for private investors and for what motives, although this topic has recently drawn much attention from a number of papers addressing specific puzzles in this field: Henderson & Pearson (2007) studied empirical differences in popular payoff diagrams between structured products with single stocks and stock market indices as underlying assets.…”

Section: Introductionmentioning

confidence: 99%

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Can utility optimization explain the demand for structured investment products?

Hens

Rieger

2013

Quantitative Finance

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In this paper, we first show that for classical rational investors with correct beliefs and constant absolute or constant relative risk aversion, the utility gains from structured products over and above a portfolio consisting of the risk-free asset and the market portfolio are typically much smaller than their fees. This result holds irrespectively of whether the investors can continuously trade the risk-free asset and the market portfolio at no costs or whether they can just buy the assets and hold them to maturity of the structured product. However, when considering behavioural utility functions, such as prospect theory, or investors with incorrect beliefs (arising from probability weighting or probability misestimation), the utility gain can be sizable. Can utility optimization explain the demand for structured investment products?Thorsten Hens * Marc Oliver Rieger † July 2, 2013Abstract In this paper, we first show that for classical rational investors with correct beliefs and constant absolute or constant relative risk aversion, the utility gains from structured products over and above a portfolio consisting of the risk-free asset and the market portfolio are typically much smaller than their fees. This results holds irrespectively of whether the investors can continuously trade the risk-free asset and the market portfolio at no costs or whether they can just buy the assets and hold them to maturity of the structured product. However, when considering behavioral utility functions, such as prospect theory, or investors with incorrect beliefs (arising from probability weighting or probability misestimation), the utility gain can be sizable.JEL classification: G11,D14,C61,D03,D18.

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Section: A Utility Maximization Model For Structured Productsmentioning

confidence: 96%

Section: Introductionmentioning

confidence: 99%

Can utility optimization explain the demand for structured investment products?

Hens

Rieger

2013

Quantitative Finance

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“…Following Wilkens and Stoimenov (2007), our measure of overpricing ∆V i is the relative difference between the issuing price P M i of TBRC i and the corresponding theoretical value P T i :…”

Section: Datamentioning

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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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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“…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).…”

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 leverage products: An empirical investigation of the German market for ‘long’ and ‘short’ stock index certificates

Cited by 66 publications

References 10 publications

Can utility optimization explain the demand for structured investment products?

Can utility optimization explain the demand for structured investment products?

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

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

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