IDEAS home Printed from https://ideas.repec.org/a/inm/ormoor/v48y2023i1p520-543.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/moor.2022.1278
    Download Restriction: no
    File URL: https://libkey.io/10.1287/moor.2022.1278?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormoor:v:48:y:2023:i:1:p:520-543. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.