The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market

This paper presents the first analysis of open-end leverage certificates on the German market. The major innovations of these certificates are twofold. First, issuers announce a price-setting formula according to which they are willing to buy and sell the certificates over time. Second, the product’s lifetime is potentially endless. Our main findings are that the price-setting formula is (i) designed to strongly favor the issuer and (ii) is consistent with the main outcome of the ‘life cycle hypothesis’ for structured financial products Stoimenov, P.A., Wilkens, S., 2005. Are structured products ‘fairly’ priced? An analysis of the German market for equity-linked instruments. Journal of Banking and Finance 29, 2971–2993]. (iii) This holds for different product features and also in the presence of issuers’ credit risk and jump risk in the underlying.