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Contingent Capital with Stock Price Triggers in Interbank Networks

Author

Listed:
  • Anne G. Balter

    (Department of Econometrics and Operations Research, Oregon Tilburg School of Economics and Management, Tilburg University, 5000 LE Tilburg, Netherlands)

  • Nikolaus Schweizer

    (Department of Econometrics and Operations Research, Oregon Tilburg School of Economics and Management, Tilburg University, 5000 LE Tilburg, Netherlands)

  • Juan C. Vera

    (Department of Econometrics and Operations Research, Oregon Tilburg School of Economics and Management, Tilburg University, 5000 LE Tilburg, Netherlands)

Abstract

This paper studies the existence and uniqueness of equilibrium prices in a model of the banking sector in which banks trade contingent convertible bonds with stock price triggers among each other. This type of financial product was proposed as an instrument for stabilizing the global banking system after the financial crisis. Yet it was recognized early on that these products may create circularity problems in the definition of stock prices—even in the absence of trade. We find that, if conversion thresholds are such that bond holders are indifferent about marginal conversions, there exists a unique equilibrium irrespective of the network structure. When thresholds are lower, the existence of equilibrium breaks down, whereas higher thresholds may lead to multiplicity of equilibria. Moreover, there are complex network effects. One bank’s conversion may trigger further conversions—or prevent them, depending on the constellations of asset values and conversion triggers.

Suggested Citation

  • Anne G. Balter & Nikolaus Schweizer & Juan C. Vera, 2023. "Contingent Capital with Stock Price Triggers in Interbank Networks," Mathematics of Operations Research, INFORMS, vol. 48(1), pages 520-543, February.
    • Handle: RePEc:inm:ormoor:v:48:y:2023:i:1:p:520-543
    DOI: 10.1287/moor.2022.1278
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    References listed on IDEAS

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    Cited by:

    1. Po Li & Tingting Que & Jing Xie & Yuxiang Zhong, 2025. "Convertible Bonds and Firm Value: Evidence from China and Beyond," Working Papers 202522, University of Macau, Faculty of Business Administration.

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