CoCos under short-term uncertainty

Abstract

In this paper we analyze an extension of the Jeanblanc and Valchev [12] model by considering a short-term uncertainty model with two noises. It is a combination of the ideas of Duffie and Lando [9] and Jeanblanc and Valchev [12]: share quotations of the firm are available at the financial market, and these can be seen as noisy information about the fundamental value, or the firm's asset, from which a low level produces the credit event. We assume there are also reports of the firm, release times, where this short-term uncertainty disappears. This credit event model is used to describe conversion and default in a CoCo bond.