Credit Risk and Bank Margins in Structured Financial Products: Evidence from the German Secondary Market for Discount Certificates

This paper analyzes bank margins in the German secondary market for exchange-tradedstructured financial products, with particular emphasis on the influence of banks credit risk.A structural model allowing for the incorporation of correlation effects between market andcredit risk is applied to compare quoted and fair theoretical prices. For discount certificates, asthe most popular type of structured financial products in Germany, an empirical study isconducted. Compared to earlier studies, total margins are found to be rather low, whereas theportion which draws back to credit risk appears to be a material part of the total margin.

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Year of publication:	2008
Authors:	Baule, Rainer ; Entrop, Oliver ; Wilkens, Marco
Institutions:	Lehrstuhl für ABWL, Finanzierung und Bankbetriebslehre <Eichstätt-Ingolstadt>
Published in:	Katholische Universität Eichstätt-Ingolstadt, School of Management, Chair of Finance and Banking - Publikationen In: Journal of Futures Markets ; 28(4), 2008, 376-397
Subject:	Kreditrisiko \| Strukturiertes Finanzprodukt \| Sekundärmarkt

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1. Introduction
2. Valuing Vulnerable Discount Certificates
2.1 Replicating Portfolio
2.2 The Issuer Model
2.3 The Underlying Model
2.4 Numerical Example
3. Empirical Analysis
3.1 Preliminaries
3.2 Data and Empirical Methods
3.3 Calibration of the Model
3.4 Empirical Results
4. Conclusions

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