The Order Flow of Discount Certificates and Issuer Pricing Behavior

48 Pages Posted: 13 Feb 2009 Last revised: 5 Aug 2013

Date Written: February 9, 2011

Abstract

We analyze the order flow of discount certificates, its dependence on the product's age, and the implications for issuer pricing behavior. Based on a unique data set of exchange trades and issuer quotes, we find that investors prefer to buy products that mature in just over 1 year from the purchase for tax reasons. Furthermore, they tend to sell products back preferably close to maturity. These patterns in the trade direction allow us to separate the issuer pricing behavior from (i) the life cycle and (ii) the order flow. We find evidence that 7 out of 11 issuers anticipate the order flow and price in an additional margin in phases of positive expected net sales.

Keywords: discount certificate, life cycle, order flow, structured financial product

JEL Classification: D40, G13, G21

Suggested Citation

Baule, Rainer, The Order Flow of Discount Certificates and Issuer Pricing Behavior (February 9, 2011). Journal of Banking and Finance 35 (11/2011), 3120–3133. Available at SSRN: https://ssrn.com/abstract=1341991

Rainer Baule (Contact Author)

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

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