Efficient Pricing of Contingent Convertibles Under Smile Conform Models

Corcuera, José Manuel; Spiegeleer, Jan De; Ferreiro-Castilla, Albert; Kyprianou, Andreas E.; Madan, Dilip B.; Schoutens, Wim

doi:10.2139/ssrn.1954671

Cited by 14 publications

(15 citation statements)

References 16 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The models were introduced in a Black-Scholes framework in De Spiegeleer and Schoutens [6] and De Spiegeleer et al [7]. Pricing CoCos under smile conform models can be found in Corcuera et al [8]. Based on the Heston model, the impact of skew is discussed in De Spiegeleer et al [9].…”

Section: The Equity Derivatives Modelmentioning

confidence: 99%

The Impact of a New CoCo Issuance on the Price Performance of Outstanding CoCos

Spiegeleer

Höcht²,

Marquet

et al. 2016

Innovations in Derivatives Markets

Self Cite

View full text Add to dashboard Cite

Contingent convertible bonds (CoCos) are new hybrid capital instruments that have a loss absorbing capacity which is enforced either automatically via the breaching of a particular CET1 level or via a regulatory trigger. The price performance of outstanding CoCos, after a new CoCo issue is announced by the same issuer, is investigated in this paper via two methods. The first method compares the returns of the outstanding CoCos after an announcement of a new issue with some overall CoCo indices. This method does not take into account idiosyncratic movements and basically compares with the general trend. A second model-based method compares the actual market performance of the outstanding CoCos with a theoretical model. The main conclusion of the investigation of 24 cases of new CoCo bond issues is a moderated negative effect on the outstanding CoCos.

show abstract

Section: The Equity Derivatives Modelmentioning

confidence: 99%

The Impact of a New CoCo Issuance on the Price Performance of Outstanding CoCos

Spiegeleer

Höcht²,

Marquet

et al. 2016

Innovations in Derivatives Markets

Self Cite

View full text Add to dashboard Cite

show abstract

“…As opposed to the previous sections, we shall now consider a numerical approach to pricing, based on exploiting the so-called Wiener-Hopf factorization of the driving Lévy process (X t ) t≥0 . This approach has been recently applied in order to price contracts with path-dependent payoffs as in [12,31]; see more details below.…”

Section: An Exponential Lévy Modelmentioning

confidence: 99%

“…Remark 10 [12] provides an alternative approach which exploits the Wiener-Hopf factorization in a different way: instead of computing first-time passage probabilities as done here, what is computed is the joint density of (X t , X t ). As the noise driving share prices, the authors consider the so-called Beta-Variance Gamma (β-VG) process-also referred to as Lamperti-Stable process by [3]-which exhibits the same exponential decay as the Variance Gamma process, hence leading to a smileconform model.…”

Section: Propositionmentioning

confidence: 99%

Pricing CoCos with a Market Trigger

Corcuera

Valdivia

2015

Springer Proceedings in Mathematics &Amp; Statistics

Self Cite

View full text Add to dashboard Cite

Contingent Convertible Bonds, or CoCos, are contingent capital instruments which are converted into shares, or may suffer a principal write-down, if certain trigger event occurs. In this paper we discuss some approaches to the problem of pricing CoCos when its conversion and the other relevant credit events are triggered by the issuer's share price. We introduce a new model of partial information which aims at enhancing the market trigger approach while remaining analytically tractable. We address also CoCos having the additional feature of being callable by the issuer at a series of pre-defined dates. These callable CoCos are thus exposed to a new source of risk-referred to as extension risk-since they have no fixed maturity, and the repayment of the principal may take place at the issuer's convenience.

show abstract

“…Nothing prevents the logic and the assumptions we have been using so far, to be extended to other stochastic processes and move away from the traditional Black‐Scholes setting. The fat tail risk can be handled using more appropriate processes incorporating for example Variance Gamma (Corcuera, De Spiegeleer, Ferreiro‐Castilla, Kyprianou, Madan, & Schoutens, 2011). The nature of the CoCo would indeed call for other approaches using for example stochastic volatility and hereby incorporating better all the aspects of a non‐lognormal share price.…”

Section: Negative Convexitymentioning

confidence: 99%

Multiple Trigger CoCos: Contingent Debt Without Death Spiral Risk

Spiegeleer¹,

Schoutens²

2013

Financial Market

Self Cite

View full text Add to dashboard Cite

This paper starts with the observation that the average issue size during 2012 of contingent convertible (CoCo) bonds was more than $1 bn. Typically a CoCo is converted into shares when a pre-defined capital ratio such as the core tier 1 ratio (CT1) drops below a minimum level. In some other cases, the contingent convertibles investors will suffer from a predefined haircut instead of a conversion into shares. Investors could dynamically hedge the equity exposure embedded within a contingent convertible by taking an offsetting short position in the underlying shares. This dynamic hedging can in some circumstances have a negative impact on the share price of the bank. It could indeed lead to a spiral of falling share prices. This so-called death spiral effect can only be avoided if the size of the contingent convertible is moderate compared to the amount of outstanding public traded shares. In this contribution we advocate the use of contingent debt where there is more than one conversion trigger. Banks should move away from one large single CoCo issue towards issues with multiple accounting triggers spread across an extended range. This will alleviate the death spiral risk. The expected dynamic behavior of a CoCo bond has been modeled using a credit derivates approach. From these models we then quantify the equity sensitivity and the negative gamma resulting from the design of a contingent convertible and illustrate the possible pitfalls of a death spiral on the share price.

show abstract

Efficient Pricing of Contingent Convertibles Under Smile Conform Models

Cited by 14 publications

References 16 publications

The Impact of a New CoCo Issuance on the Price Performance of Outstanding CoCos

The Impact of a New CoCo Issuance on the Price Performance of Outstanding CoCos

Pricing CoCos with a Market Trigger

Multiple Trigger CoCos: Contingent Debt Without Death Spiral Risk

Contact Info

Product

Resources

About