Capital Structure Models and Contingent Convertible Securities
We implemented a methodology to calibrate capital structure models for banks that have issued contingent convertible securities (CoCos). Typical studies involving capital structure model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. Fr...
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| Format: | Article |
| Language: | English |
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MDPI AG
2024-03-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/12/3/55 |
| _version_ | 1797239386375454720 |
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| author | Di Meng Adam Metzler R. Mark Reesor |
| author_facet | Di Meng Adam Metzler R. Mark Reesor |
| author_sort | Di Meng |
| collection | DOAJ |
| description | We implemented a methodology to calibrate capital structure models for banks that have issued contingent convertible securities (CoCos). Typical studies involving capital structure model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. From a theoretical perspective, we found that jumps in the asset value process were necessary to obtain a satisfactory fit to the market data. In practice, contingent capital conversion triggers are discretionary, and there is considerable uncertainty around when regulators are likely to enforce conversion. The market-implied conversion triggers we obtain indicate that the market expects regulators to enforce conversion while the issuing bank is a going concern, as opposed to a gone concern. This fact is presumably of interest to potential dealers, regulators, issuers, and investors. |
| first_indexed | 2024-04-24T17:50:43Z |
| format | Article |
| id | doaj.art-8ce72c3ded514955b74017040f040301 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-04-24T17:50:43Z |
| publishDate | 2024-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-8ce72c3ded514955b74017040f0403012024-03-27T14:03:07ZengMDPI AGRisks2227-90912024-03-011235510.3390/risks12030055Capital Structure Models and Contingent Convertible SecuritiesDi Meng0Adam Metzler1R. Mark Reesor2Department of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, CanadaDepartment of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, CanadaDepartment of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, CanadaWe implemented a methodology to calibrate capital structure models for banks that have issued contingent convertible securities (CoCos). Typical studies involving capital structure model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. From a theoretical perspective, we found that jumps in the asset value process were necessary to obtain a satisfactory fit to the market data. In practice, contingent capital conversion triggers are discretionary, and there is considerable uncertainty around when regulators are likely to enforce conversion. The market-implied conversion triggers we obtain indicate that the market expects regulators to enforce conversion while the issuing bank is a going concern, as opposed to a gone concern. This fact is presumably of interest to potential dealers, regulators, issuers, and investors.https://www.mdpi.com/2227-9091/12/3/55capital structure modelcontingent convertible securitiesdiscontinuous asset value processcalibration |
| spellingShingle | Di Meng Adam Metzler R. Mark Reesor Capital Structure Models and Contingent Convertible Securities Risks capital structure model contingent convertible securities discontinuous asset value process calibration |
| title | Capital Structure Models and Contingent Convertible Securities |
| title_full | Capital Structure Models and Contingent Convertible Securities |
| title_fullStr | Capital Structure Models and Contingent Convertible Securities |
| title_full_unstemmed | Capital Structure Models and Contingent Convertible Securities |
| title_short | Capital Structure Models and Contingent Convertible Securities |
| title_sort | capital structure models and contingent convertible securities |
| topic | capital structure model contingent convertible securities discontinuous asset value process calibration |
| url | https://www.mdpi.com/2227-9091/12/3/55 |
| work_keys_str_mv | AT dimeng capitalstructuremodelsandcontingentconvertiblesecurities AT adammetzler capitalstructuremodelsandcontingentconvertiblesecurities AT rmarkreesor capitalstructuremodelsandcontingentconvertiblesecurities |