An Experimental Analysis of Contingent Capital with Market-Price Triggers
AbstractWe report an experiment that evaluates three market-based regimes for triggering the conversion of contingent capital bonds into equity: a Òfixed-triggerÓ regime, where a price threshold triggers mandatory conversion, a ÒregulatorÓ regime, where regulators make conversion decisions based on prices and a Òprediction-marketÓ regime, where regulators also observe a market that predicts conversion. Consistent with theory, we observe inefficiencies and conversion errors in the fixed-trigger and regulator regimes. The prediction market somewhat improves the regulatorÕs performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.
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Bibliographic InfoPaper provided by VCU School of Business, Department of Economics in its series Working Papers with number 1102.
Length: 41 pages
Date of creation: Oct 2011
Date of revision: Apr 2013
bank regulation; experiments; contingent capital;
Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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