Journal of Credit Risk

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

Matthias Walter, Björn Häckel and Andreas Rathgeber

  • CLN in the German secondary market are strongly mispriced.
  • The product life cycle theory can be confirmed for CLN.
  • The mispricing of CLN increases with increasing product complexity.
  • The overpricing of CLN significantly decreased after the financial crisis (in 2007-2009).


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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