We analyze the order flow of discount certificates, its dependence on product age, and the implications for issuer pricing behavior. Based on a unique data set of exchange trades and issuer quotes, we find that for tax reasons investors prefer to buy products that mature in just over 1year from the date of purchase. Furthermore, they tend to sell products back preferably close to maturity. These patterns in the trade direction allow us to separate the issuer pricing behavior from (i) the life cycle and (ii) the order flow. We find evidence that 7 out of 11 issuers anticipate the order flow and price in an additional margin in phases of positive expected net sales.

In the pricing of exotic options, model risk arises when different models yield different prices, even though they are calibrated to the same observable prices of plain vanilla options. We analyze model risk in the case of barrier options and bonus certificates. This study uses an empirical data set of over 40,000 certificates to analyze the real market extent of model risk for traded barrier options. In particular, applying the local volatility model, the Heston model, and the Bates model, theoretical model risk amounts to about 8.5% (median) of the barrier option value. In contrast, the median empirical model risk, based on the range of market prices, is only 2.2%. We find evidence that the majority of issuers prefer stochastic volatility over local volatility models. Model risk is a factor priced into issuers’ margin policy—that is, they let retail customers pay for their model risk.

Regulation of the market for structured retail investment products in Germany switched from voluntary self-regulation to government regulation. In 2014, issuers of structured retail products subscribed to the “Fairness Code” as an instrument of self-regulation. A key measure of the Fairness Code was the mandatory disclosure of an “Issuer Estimated Value” (IEV) to provide information about hidden investment costs for the retail customer. In 2018, this measure became obsolete, since the new EU regulation on Packaged Retail and Insurance-Based Investment Products (PRIIPs) prescribed a direct disclosure of investment costs. We compare these instruments of voluntary self-regulation and government regulation and analyze issuers’ disclosure policies under both regimes. The new regulation effectively forces issuers to report actual costs correctly. In contrast, the self-regulated IEV was of limited use for retail investors, because (i) its definition was ambiguous, and (ii) issuers exploited this opaqueness by reporting disproportionately high IEVs. Hence, under voluntary self-regulation issuers professed transparency and fairness, but continued to hide costs in their prices.