The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market

This paper presents the first analysis of open-end leverage certificates on the Germanmarket. The major innovations of these certificates are twofold. First, issuers announcea price-setting formula according to which they are willing to buy and sell thecertificates over time. Second, the products lifetime is potentially endless. Our mainfindings are that the price-setting formula is i) designed to strongly favor the issuer andii) is consistent with the main outcome of the ‘life cycle hypothesis’ for structuredfinancial products (Stoimenov and Wilkens, 2005). iii) This holds for different productfeatures and also in the presence of issuers’ credit risk and jump risk in the underlying.