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@article{Jang:2018:10.1016/j.irfa.2018.07.003,
author = {Jang, HJ and Na, YH and Zheng, H},
doi = {10.1016/j.irfa.2018.07.003},
journal = {International Review of Financial Analysis},
pages = {77--93},
title = {Contingent convertible bonds with the default risk premium},
url = {http://dx.doi.org/10.1016/j.irfa.2018.07.003},
volume = {59},
year = {2018}
}

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TY  - JOUR
AB  - 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.
AU  - Jang,HJ
AU  - Na,YH
AU  - Zheng,H
DO  - 10.1016/j.irfa.2018.07.003
EP  - 93
PY  - 2018///
SN  - 1057-5219
SP  - 77
TI  - Contingent convertible bonds with the default risk premium
T2  - International Review of Financial Analysis
UR  - http://dx.doi.org/10.1016/j.irfa.2018.07.003
UR  - http://hdl.handle.net/10044/1/62809
VL  - 59
ER  -

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