When ratios fall: A dynamic approach to contingent convertibles
Updated
Updated · arxiv.org · Aug 17
When ratios fall: A dynamic approach to contingent convertibles
1 articles · Updated · arxiv.org · Aug 17
Summary
Researchers have developed a new valuation framework for contingent convertible (CoCo) bonds, linking their pricing to banks’ CET1 capital ratios and market data.
The model uses a bivariate jump-diffusion approach to capture the dynamic relationship between capital ratios, share prices, and CoCo bond values, including regulatory intervention risk.
Case studies, including the 2023 Credit Suisse collapse, show improved pricing and hedging accuracy, highlighting the importance of adaptive models for financial stability.