Market Pricing of Credit Linked Notes: The Influence of the Financial Crisis

32 Pages Posted: 14 Jun 2016

See all articles by Matthias Walter

Matthias Walter

University of Augsburg

Bjoern Haeckel

University of Augsburg

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

Date Written: March 10, 2016

Abstract

In Germany, structured financial products already account for 6–8% of all assets invested, proving that the market for these products is still very attractive for retail investors. A question often discussed in this context is whether these products are priced fairly. One of the latest contributions in this field is the paper by Rathgeber and Wang (2011), who analyzed the pricing of credit linked notes (CLNs) in the primary market. In this paper, we significantly extend the work of Rathgeber and Wang (2011) and analyze the effect of the 2007–9 financial crisis on the pricing of CLNs: specifically, on their pricing in the secondary market. Therefore, we analyse the pricing of ninety CLNs covering 13 555 daily quoted prices. In addition to the major finding that CLNs in the secondary market are not only overpriced but also underpriced in many cases, we discover that the overpricing of CLNs significantly decreased after the financial crisis.

Keywords: credit linked notes, market pricing, fair value, financial crisis, product life cycle

Suggested Citation

Walter, Matthias and Haeckel, Bjoern and Rathgeber, Andreas, Market Pricing of Credit Linked Notes: The Influence of the Financial Crisis (March 10, 2016). Journal of Credit Risk, Vol. 12, No. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2794956

Matthias Walter

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Bjoern Haeckel

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Andreas Rathgeber (Contact Author)

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

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