File Download

  • Find it @ UNIST can give you direct access to the published full text of this article. (UNISTARs only)
Related Researcher

장현진

Jang, Hyun Jin
Risk Analysis Lab.
Read More

Views & Downloads

Detailed Information

Cited time in webofscience Cited time in scopus
Metadata Downloads

Contingent convertible bonds with the default risk premium

Author(s)
Jang, Hyun JinNa, Young HoonZheng, Harry
Issued Date
2018-10
DOI
10.1016/j.irfa.2018.07.003
URI
https://scholarworks.unist.ac.kr/handle/201301/24322
Fulltext
https://www.sciencedirect.com/science/article/pii/S1057521918303016
Citation
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS, v.59, pp.77 - 93
Abstract
Contingent convertible bonds (CoCos) are hybrid instruments characterized by both debt and equity. CoCos are automatically converted into equity or written down when a predefined trigger event occurs. The present study quantifies the issuing bank's default risk that only manifests in the post-conversion period for pricing CoCos depending on a loss-absorbing method. This work aims to reflect the distinct features of equity-conversion CoCos - in contrast to a write-down CoCos - in a valuation framework. Accordingly, we propose a model to compute the ratio of common equity Tier 1 (CET1), which is composed of core capital and risky assets, by employing a geometric Brownian motion and a random variable. Then, we formulate the post-conversion risk premium by measuring the probability with which the bank's CET1 ratio breaches a regulatory default threshold after conversion. Finally, we empirically examine a positive value of the post-conversion risk premium embedded in the market prices of equity-conversion CoCos.
Publisher
Elsevier BV
ISSN
1057-5219

qrcode

Items in Repository are protected by copyright, with all rights reserved, unless otherwise indicated.