Listing of classical options and the pricing of discount certificates

Andrea Schertler

Journal of Banking & Finance, 2021, vol. 123, issue C

Abstract: Do new listings of EUREX options affect the prices of discount certificates that are replicated with precisely such a newly listed option? An event study provides a significantly negative average abnormal margin change on the day on which the EUREX option of the replication portfolio is listed. I model the abnormal margin changes as a function of hedging cost, unhedgeable risk, and price pressure. Higher hedging costs, higher opportunity costs from unhedgeable risk, and lower intra-EUWAX competition lead to significantly lower abnormal margin changes. I interpret the effect of intra-EUWAX competition as a price pressure effect. Economically, rebalancing and opportunity costs from unhedgeable risk are the most important drivers of abnormal margin changes when EUREX options are listed.

Keywords: Discount certificate; Connectivity between financial markets; Event study; Hedging costs; Unhedgeable risk; Price pressure (search for similar items in EconPapers)
JEL-codes: D40 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:123:y:2021:i:c:s0378426620302727

DOI: 10.1016/j.jbankfin.2020.106011

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