Rossetto, Silvia and Van Bommel, Jos (2009) Endless Leverage Certificates. Journal of Banking and Finance, Vol. 33 (n° 8). pp. 1543-1553.

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Abstract

Endless Leverage Certificates are long or short positions in an underlying that are partly financed with a loan from an ssuing bank. The default risk for the bank is limited ecause the position is unwound if the underlying breaches a redetermined stoploss level. We show that the value of an LC is virtually independent of the volatility of the nderlying, and is at most 0.3% higher than its intrinsic alue. We investigate several potential pitfalls of ELCs, uch as the liquidity, the valuation of the instruments, and he price-impact upon unwinding. We find that ELCs are competitively priced and traded. For a sample of 5,129 ELCs ssued on DAX-30 stocks we find an average bid-ask spread of .25% relative to the underlying value, which is ignificantly lower than comparable spreads on covered arrants and eoptions. We find that on average, ELC-longs (- horts) are overpriced by 0.51% (1.01%) relative to their ntrinsic values. An intraday event study on stoploss riggers shows a pronounced increase in trading activity ollowing stoploss events, but a negligible price impact