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Close form pricing formulas for Coupon Cancellable CoCos

Author

Listed:
  • Corcuera, José Manuel
  • De Spiegeleer, Jan
  • Fajardo, José
  • Jönsson, Henrik
  • Schoutens, Wim
  • Valdivia, Arturo

Abstract

Contingent Convertibles (“CoCos”) are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called death-spiral effect: by actively hedging the equity risk, investors can (unintentionally) force the conversion by making the share price deteriorate and eventually trigger the conversion.

Suggested Citation

  • Corcuera, José Manuel & De Spiegeleer, Jan & Fajardo, José & Jönsson, Henrik & Schoutens, Wim & Valdivia, Arturo, 2014. "Close form pricing formulas for Coupon Cancellable CoCos," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 339-351.
    • Handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:339-351
    DOI: 10.1016/j.jbankfin.2014.01.025
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Alexander Lipton, 2001. "Mathematical Methods for Foreign Exchange:A Financial Engineer's Approach," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 4694, February.
    3. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    4. Stan Maes & Wim Schoutens, 2012. "Contingent Capital: An In-Depth Discussion," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 41(1-2), pages 59-79, February.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Pierre Durand & Gaëtan Le Quang, 2020. "Banks to basics! Why banking regulation should focus on equity," EconomiX Working Papers 2020-2, University of Paris Nanterre, EconomiX.
    2. Donatien Hainaut & Yang Shen & Yan Zeng, 2018. "How do capital structure and economic regime affect fair prices of bank’s equity and liabilities?," Annals of Operations Research, Springer, vol. 262(2), pages 519-545, March.
    3. Jan De Spiegeleer & Stephan Höcht & Ine Marquet & Wim Schoutens, 2017. "CoCo bonds and implied CET1 volatility," Quantitative Finance, Taylor & Francis Journals, vol. 17(6), pages 813-824, June.
    4. Wolff, Christian & Masror Khah, Sara Abed, 2015. "The Determinants of CoCo Bond Prices," CEPR Discussion Papers 10996, C.E.P.R. Discussion Papers.
    5. Jang, Hyun Jin & Na, Young Hoon & Zheng, Harry, 2018. "Contingent convertible bonds with the default risk premium," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 77-93.
    6. Gaëtan Le Quang, 2019. "Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds," Working Papers hal-04141886, HAL.
    7. José Fajardo, 2018. "Barrier style contracts under Lévy processes once again," Annals of Finance, Springer, vol. 14(1), pages 93-103, February.
    8. Yang, Zhaojun & Zhao, Zhiming, 2015. "Valuation and analysis of contingent convertible securities with jump risk," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 124-135.
    9. Caporale, Guglielmo Maria & Kang, Woo-Young, 2021. "On the preferences of CoCo bond buyers and sellers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    10. Francesca Erica Di Girolamo & Francesca Campolongo & Jan De Spiegeleer & Wim Schoutens, 2017. "Contingent conversion convertible bond: New avenue to raise bank capital," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-31, March.
    11. José Fajardo, 2017. "A new factor to explain implied volatility smirk," Applied Economics, Taylor & Francis Journals, vol. 49(40), pages 4026-4034, August.
    12. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    13. Jos'e Manuel Corcuera & Arturo Valdivia, 2016. "CoCos under short-term uncertainty," Papers 1602.00094, arXiv.org.
    14. Gaëtan Le Quang, 2019. "Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds," EconomiX Working Papers 2019-5, University of Paris Nanterre, EconomiX.
    15. Durand, Pierre & Le Quang, Gaëtan, 2022. "Banks to basics! Why banking regulation should focus on equity," European Journal of Operational Research, Elsevier, vol. 301(1), pages 349-372.
    16. Donatien Hainaut & Yan Shen & Yan Zeng, 2016. "How do capital structure and economic regime affect fair prices of bank's equity and liabilities?," Post-Print hal-01394133, HAL.

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    More about this item

    Keywords

    Contingent convertibles; Credit risk; Structural approach; First passage times;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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