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Addressing systemic risk using contingent convertible debt – A network analysis

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  • Gupta, Aparna
  • Wang, Runzu
  • Lu, Yueliang

Abstract

We construct a balance sheet network model to study the interconnectedness of a banking system. A simulation analysis of the buffer effect of contingent convertible (CoCo) debt in controlling contagion in a theoretical banking network model is followed by calibrating the model using 13F filings. We find that CoCo debt conversion significantly mitigates systemic risk, with a dual-trigger CoCo debt design being more effective in protecting the surviving banks. A two-tranche CoCo debt design combines the benefits of single and dual-trigger CoCo debt. The trade-offs in different designs of CoCo triggers can be evaluated in a network simulation model, as developed in this work.

Suggested Citation

  • Gupta, Aparna & Wang, Runzu & Lu, Yueliang, 2021. "Addressing systemic risk using contingent convertible debt – A network analysis," European Journal of Operational Research, Elsevier, vol. 290(1), pages 263-277.
    • Handle: RePEc:eee:ejores:v:290:y:2021:i:1:p:263-277
    DOI: 10.1016/j.ejor.2020.07.062
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    6. Ting Yao & Liangrong Song, 2023. "Can digital transformation reduce bank systemic risk? Empirical evidence from listed banks in China," Economic Change and Restructuring, Springer, vol. 56(6), pages 4445-4463, December.

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