The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market |
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Authors: | Oliver Entrop Hendrik Scholz Marco Wilkens |
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Affiliation: | Ingolstadt School of Management, Catholic University of Eichstätt-Ingolstadt, Auf der Schanz 49, D – 85049 Ingolstadt, Germany |
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Abstract: | 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. |
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Keywords: | G13 G21 G24 |
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