The Order Flow of Discount Certificates and Issuer Pricing Behavior

We analyze the order flow of discount certificates, its dependence on the product's age, and the implications for issuer pricing behavior. Based on a unique data set of exchange trades and issuer quotes, we find that investors prefer to buy products that mature in just over 1 year from the purchase for tax reasons. Furthermore, they tend to sell products back preferably close to maturity. These patterns in the trade direction allow us to separate the issuer pricing behavior from (i) the life cycle and (ii) the order flow. We find evidence that 7 out of 11 issuers anticipate the order flow and price in an additional margin in phases of positive expected net sales