Seminar

The Pricing Policy of Banks on the German Secondary Market for Leverage Certificates: Interday and Intraday Effects

Marco Wilkens, University of Augsburg

17th Feb 2012  11:30 am - Room 214/215, H69 - Economics and Business Building

This paper is the first thorough analysis of finite leverage certificates on the German market. Our study, based on a unique data set at investor- and certificate-specific level, contains more than half a million trades in DAX leverage certificates by more than 7,000 retail costumers of a large German direct bank for the years 2007 and 2008. We analyse the order flow induced by the investors and compare traded prices - rather than quotes - with corresponding theoretical fair product values. We examine deviations between the prices and the values in two directions: interday, i.e. the development of the deviations over a certificate's lifetime and intraday, i.e. deviations depending on the time of day the trade is made. Our major results can be summarized as follows: (i) Leverage certificates are overpriced. (ii) The "Life Cycle Hypothesis" by Stoimenov and Wilkens (JBF, 2005), initially developed for long-term investment certificates, also holds for short-term leverage certificates. This interday effect is more pronounced the less likely a premature knock-out of the certificate is. (iii) At the end of the underlying's trading hours issuers increase the prices. (iv) The issuers' pricing policy is consistent with the customer-driven order flow and the overnight gap risk issuers face.