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Credit risk and bank margins in structured financial products: Evidence from the German secondary market for discount certificates

Rainer Baule · Oliver Entrop · Marco Wilkens

64 citations0/0 files storedJournal of Futures Markets

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Credit Risk and Financial Regulations Stochastic processes and financial applications Risk Management in Financial Firms

Abstract

Abstract This study analyzes bank margins in the German secondary market for exchange‐traded structured financial products, with particular emphasis on the influence of banks' credit risk. A structural model allowing for the incorporation of correlation effects between market and credit risk is applied to compare quoted and fair theoretical prices. For discount certificates, as the most popular type of structured financial products in Germany, an empirical study is conducted. Compared to earlier studies, total margins are found to be rather low, whereas the portion that draws back to credit risk appears to be a material part of the total margin. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 376–397, 2008

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References

1973The Pricing of Options and Corporate Liabilities 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*2003Options, Futures and Other Derivatives 1987Parsimonious Modeling of Yield Curves 2003Credit Derivatives Pricing Models 1987The Pricing of Options with Default Risk 1995The impact of default risk on the prices of options and other derivative securities 1996Pricing Black-Scholes options with correlated credit risk

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