Implicit Premiums of Equity-Linked Structured Products in the German Market: The Case of Discount and Bonus Certificates

Abstract

Structured products, also known as certificates, have become increasingly popular in Germany since the 1990s. They offer retail investors, who conventionally do not have access to institutional marketplaces, the opportunity to also participate in both sideways-trending and even falling markets, next to ordinary participation in rising markets. In December 2020, 1,462,572 certificates were outstanding in Germany. However, as a result of this high number of products, issuing institutions set the market prices of their products themselves in order to ensure sufficient liquidity. This raises the question of whether these observed prices can be classified as 'fair' or whether the issuers are overpricing their products. Over the past 20 years, various researchers have examined several products in Germany and discovered implicit premiums in favour of issuing institutions. However, implicit premiums have last been analysed of bonus and discount certificates outstanding in 2008 and 2013, respectively. This paper, therefore, investigates the pricing of discount and bonus certificates, issued on the DAX, representing two of the most popular types of equity-linked structured products in Germany. Evaluating, on average, a data set of 13,388 discount certificates and 1,013 bonus certificates over a five-day observation period, the paper finds significant weighted average overpricing of 0.39% and 3.40%, respectively, in favour of the issuing institutions. Furthermore, in line with previous research, the thesis finds evidence that these implicit premiums systematically decrease with a certificate’s remaining lifetime. Moreover, it finds that implicit premiums systematically decrease with increases in a certificate’s moneyness. Lastly the thesis reports contradicting results on the influence of product competition on these premiums.