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Contagion in the CoCos market? A case study of two stress events

Author

Listed:
  • Pierluigi Bologna

    () (Bank of Italy)

  • Arianna Miglietta

    () (Bank of Italy)

  • Anatoli Segura

    () (Bank of Italy)

Abstract

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Suggested Citation

  • Pierluigi Bologna & Arianna Miglietta & Anatoli Segura, 2018. "Contagion in the CoCos market? A case study of two stress events," Temi di discussione (Economic working papers) 1201, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1201_18
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2018/2018-1201/en_tema_1201.pdf
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    References listed on IDEAS

    as
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    5. Avdjiev, Stefan & Bogdanova, Bilyana & Bolton, Patrick & Jiang, Wei & Kartasheva, Anastasia, 2017. "CoCo Issuance and Bank Fragility," CEPR Discussion Papers 12418, C.E.P.R. Discussion Papers.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    The post-crisis regulatory framework has fostered the development of the contingent convertible bonds (CoCos) market. These instruments permit banks to absorb losses as a going concern but their critics warn that they could have potentially destabilizing effects in stress situations. We analyse the dynamics of the European CoCos market during two stress episodes that occurred in 2016 and that were triggered by news of substantial unexpected losses faced by a European systemically important bank. Our econometric approach aims to disentangle the fundamental channel by which the contagion of such bank’s distress spreads to the rest of the market from a possible CoCo-specific contagion channel. We find evidence of significant CoCo-specific contagion in the two stress episodes; which could be the result of investors’ reassessment of the CoCos’ riskiness or of uncertainty about their supervisory treatment. Moreover; we find that the CoCo-specific contagion was weaker in the second stress event; suggesting that as investors learn about the specific features of these instruments and their supervisory treatment the CoCos market becomes more resilient.;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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