Direct and Indirect Competition Among Structured Financial Products: The Case of Discount Certificates in Germany

Abstract

This article investigates effects of direct and indirect product competition on overpricing of discount certificates in Germany. The results indicate that whereas indirect competition reduces overpricing, certificates with direct competitors are more overpriced at their issuance than certificates without direct competitors. The study further documents that (1) certificates with direct competitors are more likely to be traded than certificates without, and (2) outstanding certificates whose prices have been increased recently are more likely to receive a direct competitor from another issuer than certificates whose prices have been decreased. Thus, this study indicates that it pays off for issuers to bring direct competitors to the market, and it indicates a potential link between issuers’ price setting and the issuance behavior of other issuers, which is new to the literature.

Keywords: discount certificate, duplication, product competition, structured financial product

JEL Classification: D40, G13