The effect of issuer leverage on issuer bid and ask quotes for structured retail products

Stefan Petry

The European Journal of Finance, 2021, vol. 27, issue 11, 1073-1097

Abstract: The financial institution that issues a structured retail product (SRP) becomes the dealer for that security. Issuer–dealer funding constraints can directly impact price quotes for SRPs. The 2007–2009 financial crisis diminished issuer funding liquidity, and both bid and ask quotes declined, with the decrease in bids being significantly greater than that for the asks. A reduction in the bid (ask) discourages (encourages) investor selling (buying) and helps preserve dealer capital. The SRP’s intrinsic value places a bound on how far the ask needs to be reduced to induce investor buying. High-leverage (low-leverage) issuers are the most (least) financially constrained and decrease their bids by a significant 167% (nonsignificant 41%) compared to the pre-crisis average. The decrease in asks is nonsignificant for both groups.

Date: 2021
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DOI: 10.1080/1351847X.2020.1860108

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