Tuesday, July 30, 2013

SLCG Research: Structured Certificates of Deposit

By Tim Dulaney, PhD and Tim Husson, PhD

Lately, we've been fascinated by structured certificates of deposit (CDs), also known as 'market-linked CDs', 'equity-linked CDs', 'market contingent CDs', etc.  Structured CDs are bank deposits that have interest payments linked to market indexes, individual stocks, commodities, or any other underlying asset.  Unlike structured products, which have public SEC disclosure documents, structured CDs are not well studied and even the size of the market is not perfectly clear.  We covered the basics of structured CDs in a concentrated week of coverage as well as a couple sporatic posts on the blog.

Today we have released a new working paper on structured CDs, available from the SLCG website (PDF) as well as SSRN.  In it, we provide a glimpse into this obscure market by summarizing over 2,000 structured CDs issued over the past few years.  We analyze four particular types  that were common in our sample and value over 300 structured CDs issued by a variety of banks.

Our results were surprising.  One might think that because structured CDs are FDIC insured, their reduced credit risk relative to structured products would make them more valuable to investors.  However, we document mispricing of structured CDs from face value that is of similar magnitude to that seen in the structured products market.  This suggests that in the aggregate, issuers are able to charge investors a similar level of gross margin in structured products and structured CDs.

Please check out the paper, and as always, let us know if you have any questions or comments.

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