Abstract

Extreme Stock Market Movements and Intraday Prices of Endless Leverage Index Certificates: The Kerviel Case

As a consequence of the losses resulting from the speculative activities of the stock trader Jérôme Kerviel of Société Générale, the DAX saw a drop of over 7% on 21 January 2008. This is the date on which the highest daily loss was recorded after issuance of the first endless leverage index certificates in 2001. This clinical study analyses the intraday pricing activities of five issuers of endless leverage index certificates on the DAX for this crash day. We have found significant economic and statistical differences between the pricing activities of the individual issuers. In addition, the empirically observed relative valuation difference between the listed price and the fair value also depends on leverage. In the case of long certificates, leverage is responsible for a positive influence on the relative valuation difference and vice versa where short certificates are concerned. The issuers have been found to apply different strategies when adjusting the width of their bid/ask price spread. The relative spread significantly correlates with the relative valuation difference in each case. The relative difference between the DAX cash market and the DAX futures market is the inverse of the valuation difference between listed prices and fair value in the case of long certificates and vice versa in the case of short certificates.