The Pricing Policy of Banks for Exchange-Traded Leverage Certificates : Interday and Intraday Effects

This paper analyzes the pricing policy of banks for retail exchange-traded leverage certificates. Based on a unique trade data set, we analyze the order flow induced by the investors and compare traded prices with corresponding theoretical fair product values. Our major results are: (i) Intraday effect: Traded leverage certificates are overpriced but the overpricing strongly depends on the time of day the trade is made. At the end of the underlying's daily trading hours, issuers increase the prices. (ii) Interday effect: The overpricing decreases over the certificate's lifetime. (iii) The intraday (interday) effect is more pronounced the more (less) likely a premature knock-out of the certificate is. (iv) Both effects are consistent with the investors' order flow and the gap risk faced by issuers. Banks try to exploit systematic trading patterns of investors to increase their profits