Valuation and analysis of contingent convertible securities with jump risk

Yang, Zhaojun; Zhao, Zhiming

doi:10.1016/j.irfa.2015.05.029

Cited by 17 publications

(15 citation statements)

References 28 publications

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“…Last, CCS does not lead to inefficiencies from asset substitution or debt overhang only if the straight bond is protected, as argued by Yang and Zhao (2015).…”

Section: Discussionmentioning

confidence: 97%

“…We give a systematic analysis of how conversion thresholds of CCSs and CoCos impact on capital structure and we explicitly derive the increased value of the firm who issues CCSs instead of CoCos. In particular, we provide an explicit optimal capital structure rather than only numerical results discussed by Yang and Zhao (). Interestingly, we find that the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions.…”

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

“…Our paper is most closely related to Yang and Zhao (2015), who examine CCSs under the assumption that asset value follows a jump-diffusion process instead of a geometric Brownian motion we discuss here. However, the first version of the paper is the first paper on CCSs and Yang and Zhao (2015) is actually the second one. We here present much more detailed ideas for CCSs than the latter.…”

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

See 2 more Smart Citations

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

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“…Last, CCS does not lead to inefficiencies from asset substitution or debt overhang only if the straight bond is protected, as argued by Yang and Zhao (2015).…”

Section: Discussionmentioning

confidence: 97%

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

See 1 more Smart Citation

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

Self Cite

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“…Yang and Zhao (2017) introduced contingent capital, a contingent convertible security (CCS) that repeatedly converts between debt and equity depending on the firm's financial situation: that is, if the firm falls into (recovers from) recession, it converts from debt (equity) to equity (debt). Yang and Zhao (2015) enhanced this CCS by incorporating an asset jump risk. This new type of CCS dynamically adjusts the firm's capital structure without incurring adjustment costs and does not suffer from debt overhang or risk-shifting incentive problems.…”

Section: Literature Reviewmentioning

confidence: 99%

On the Preferences of CoCo Bond Buyers and Sellers

Caporale

Kang

2020

SSRN Journal

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This paper analyses the preferences of CoCo bond buyers and sellers assuming that they are mutually exclusive, and that buyers prefer CoCo bonds with higher safety-adjusted returns. We take into account both bond and issuing banks' characteristics and investigate differences in the responses of investors in the low (25th), medium (50th) and high (75th) percentiles based on safety-adjusted returns. We find that CoCo bond buyers in those percentiles can be characterised as growth, value and active investors, respectively. In the case of sellers their needs to have bankruptcy protection and to comply with the Basel III financial regulations play a more important role than the buyers' desire to increase their income from this fixed-income instrument. Sellers prefer to issue CoCo bonds when they are not financially sound whilst buyers have a preference for CoCo bonds with low risk; therefore, they can be characterised as being risk-loving and risk-averse respectively. Globally, the strongest preference responses of buyers and sellers are found in the UK and China, and those in the 75th percentile (with the highest safety-adjusted returns) react to the widest set of CoCo bond and issuing bank's factors.

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“…Barucci and Del Viva (2012a) explored the prices of CoCos, direct equity and debt, and the capital structure of the firm with a two-period model. Yang and Zhao (2015) developed a new form of CoCo called contingent convertible securities when the value of the issuing firm follows a diffusion process with double exponential distribution jumps. However, their research does not account for the change in economic cycle.…”

Section: Introductionmentioning

confidence: 99%

Modeling of Contingent Capital Under a Double Exponential JumpDiffusion Model with Switching Regime

TRIKI¹,

ABID²

2022

EPESS

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This paper discusses a theoretical explanation that relies on investment within the framework of a regime-switching structural model whose investment cost is financed by equity and CoCos. The unexpected return of the project is governed by a continuous and temporal Markov chain. Explicit solutions have been proposed under a regime-switching structural model when the value of the cash flows generated by the firm follows a double-exponential step-distribution diffusion process. The equilibrium price theory under the jump diffusion model was developed using the structural model introduced by Leland (1994) and later extended by Kou (2002) and Chen and Kou (2009). The study focused on the influence of contingent convertibles on investment and financing policies and the inefficiencies related to debt overhang and asset substitution in the presence of an investment option

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Valuation and analysis of contingent convertible securities with jump risk

Cited by 17 publications

References 28 publications

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

On the Preferences of CoCo Bond Buyers and Sellers

Modeling of Contingent Capital Under a Double Exponential JumpDiffusion Model with Switching Regime

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