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Credit risk and bank margins in structured financial products: Evidence from the German secondary market for discount certificates
Author(s) -
Baule Rainer,
Entrop Oliver,
Wilkens Marco
Publication year - 2008
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20309
Subject(s) - german , margin (machine learning) , credit risk , business , economics , market risk , credit rating , financial system , monetary economics , actuarial science , finance , archaeology , machine learning , computer science , history
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