The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Products

Stefan Petry

doi:10.1080/1351847X.2020.1860108

The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Products

Stefan Petry

A&F Accounting & Finance

Research output: Contribution to journal › Article › peer-review

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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.

Original language	English
Journal	The European Journal of Finance
Early online date	18 Dec 2020
DOIs	https://doi.org/10.1080/1351847X.2020.1860108
Publication status	Published - 18 Dec 2020

Keywords

Structured products
Financial crisis
Leverage
Funding Constraints

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1080/1351847X.2020.1860108

SSRN-id2226089Accepted author manuscript, 1.28 MB

Cite this

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AB - 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.

KW - Structured products

KW - Financial crisis

KW - Leverage

KW - Funding Constraints

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JO - The European Journal of Finance

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The Effect of Issuer Leverage on Issuer Bid and Ask Quotes for Structured Retail Products

Abstract

Keywords

UN SDGs

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