The Pricing Policy of Banks for Exchange-Traded Leverage Certificates: Interday and Intraday Effects

40 Pages Posted: 8 Feb 2011 Last revised: 20 May 2013

Oliver Entrop

University of Passau

Alexander Schober

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: March 1, 2013

Abstract

This paper analyzes the pricing policy of banks for retail exchange-traded leverage certificates. Based on a unique trade data set, we analyze the order flow induced by the investors and compare traded prices with corresponding theoretical fair product values. Our major results are: (i) Intraday effect: Traded leverage certificates are overpriced but the overpricing strongly depends on the time of day the trade is made. At the end of the underlying’s daily trading hours, issuers increase the prices. (ii) Interday effect: The overpricing decreases over the certificate’s lifetime. (iii) The intraday (interday) effect is more pronounced the more (less) likely a premature knock-out of the certificate is. (iv) Both effects are consistent with the investors’ order flow and the gap risk faced by issuers. Banks try to exploit systematic trading patterns of investors to increase their profits.

Keywords: Leverage Certificate, Life Cycle Hypothesis, Pricing Behavior, Gap Risk, Order Flow

JEL Classification: D40, G13, G21, G24

Suggested Citation

Entrop, Oliver and Schober, Alexander and Wilkens, Marco, The Pricing Policy of Banks for Exchange-Traded Leverage Certificates: Interday and Intraday Effects (March 1, 2013). Available at SSRN: https://ssrn.com/abstract=1757710 or http://dx.doi.org/10.2139/ssrn.1757710

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Alexander Schober

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86135
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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