The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Product

European Journal of Finance, forthcoming

59 Pages Posted: 1 Mar 2013 Last revised: 18 Dec 2020

See all articles by Stefan Petry

Stefan Petry

University of Manchester - Alliance Manchester Business School

Date Written: November 28, 2020

Abstract

The financial institution that issues a structured retail product (SRP) becomes the dealer for that security. Issuer–dealer funding constraints can directly impact price quotes for SRPs. The 2007–2009 financial crisis diminished issuer funding liquidity, and both bid and ask quotes declined, with the decrease in bids being significantly greater than that for the asks. A reduction in the bid (ask) discourages (encourages) investor selling (buying) and helps preserve dealer capital. The SRP’s intrinsic value places a bound on how far the ask needs to be reduced to induce investor buying. High-leverage (low-leverage) issuers are the most (least) financially constrained and decrease their bids by a significant 167% (nonsignificant 41%) compared to the pre-crisis average. The decrease in asks is nonsignificant for both groups.

Keywords: Structured Products, Financial Crisis, Leverage, Funding Constraints

JEL Classification: G01, G12, G15, G21

Suggested Citation

Petry, Stefan, The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Product (November 28, 2020). European Journal of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=2226089 or http://dx.doi.org/10.2139/ssrn.2226089

Stefan Petry (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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