Market pricing of credit linked notes: the influence of the financial crisis

Matthias Walter, Björn Häckel and Andreas Rathgeber

Journal of Credit Risk

Abstract: ABSTRACT In Germany, structured financial products already account for 6-8% of all assets;invested, proving that the market for these products is still very attractive for retail;investors. A question often discussed in this context is whether these products are;priced fairly. One of the latest contributions in this field is the paper by Rathgeber;and Wang (2011), who analyzed the pricing of credit linked notes (CLNs) in the;primary market. In this paper, we significantly extend the work of Rathgeber and;Wang (2011) and analyze the effect of the 2007-9 financial crisis on the pricing of;CLNs: specifically, on their pricing in the secondary market. Therefore, we analyze;the pricing of ninety CLNs covering 13 555 daily quoted prices. In addition to the;major finding that CLNs in the secondary market are not only overpriced but also;underpriced in many cases, we discover that the overpricing of CLNs significantly;decreased after the financial crisis.

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