The Price-Setting Behavior of Banks: An Analysis of Open-End Leverage Certificates on the German Market

Posted: 6 Mar 2008 Last revised: 12 Aug 2010

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Marco Wilkens

University of Augsburg

Date Written: September 22, 2008

Abstract

This paper presents the first analysis of open-end leverage certificates on the German market. The major innovations of these certificates are twofold. First, issuers announce a price-setting formula according to which they are willing to buy and sell the certificates over time. Second, the product's lifetime is potentially endless. Our main findings are that the price-setting formula is i) designed to strongly favor the issuer and ii) is consistent with the main outcome of the 'life cycle hypothesis' for structured financial products (Stoimenov and Wilkens, 2005). iii) This holds for different product features and also in the presence of issuers' credit risk and jump risk in the underlying.

Keywords: Structured products, Certificates, Hedging, German market, Pricing

JEL Classification: G13, G21, G24

Suggested Citation

Entrop, Oliver and Scholz, Hendrik and Wilkens, Marco, The Price-Setting Behavior of Banks: An Analysis of Open-End Leverage Certificates on the German Market (September 22, 2008). Journal of Banking and Finance, Vol. 33, No. 5, pp. 874-882, 2009. Available at SSRN: https://ssrn.com/abstract=940448

Oliver Entrop

University of Passau ( email )

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

Hendrik Scholz (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
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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