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On Pricing Contingent Capital Notes

In: Recent Advances In Financial Engineering 2011

Author

Listed:
  • Dilip B. Madan

    (Robert H. Smith School of Business, University of Maryland, College Park, MD. 20742, USA)

Abstract

A bank's stock price is modeled as a call option on the spread of random assets over random liabilities. The logarithm of assets and liabilities are jointly modeled as driven by four variance gamma processes and this model is estimated by calibrating to quoted equity options seen as compound spread options. On defining riskweighted assets as asset value less the bid price plus the ask price of liabilities less the liability value we endogenize capital adequacy ratios following the methods of conic finance for the bid and ask prices. All computations are illustrated on CSGN.VX, ADRed into USD on March 29 2011.

Suggested Citation

  • Dilip B. Madan, 2012. "On Pricing Contingent Capital Notes," World Scientific Book Chapters, in: Akihiko Takahashi & Yukio Muromachi & Hidetaka Nakaoka (ed.), Recent Advances In Financial Engineering 2011, chapter 2, pages 21-42, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407335_0002
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