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An Experimental Analysis of Contingent Capital with Market-Price Triggers

Author

Listed:
  • Douglas D. Davis

    () (Department of Economics, VCU School of Business)

  • Korenok Oleg

    () (Department of Economics, VCU School of Business)

  • Edward S. Prescott

    () (Federal Reserve Bank of Richmond)

Abstract

We 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.

Suggested Citation

  • Douglas D. Davis & Korenok Oleg & Edward S. Prescott, 2011. "An Experimental Analysis of Contingent Capital with Market-Price Triggers," Working Papers 1102, VCU School of Business, Department of Economics, revised Apr 2013.
  • Handle: RePEc:vcu:wpaper:1102
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    File URL: http://www.people.vcu.edu/~okorenok/repec_files/CoCo_Apr30_2013.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:ijc:ijcjou:y:2017:q:2:a:2 is not listed on IDEAS
    2. Edward Simpson Prescott, 2012. "Contingent capital: the trigger problem," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 33-50.
    3. Douglas Davis & Edward Simpson Prescott, 2017. "Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 33-71, June.

    More about this item

    Keywords

    bank regulation; experiments; contingent capital;

    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; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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