Working Paper: The information content in contingent convertible bond prices

Working Paper - December 2017 - No. 122

Authors Kristiansen, Kristian Loft; Grinderslev, Oliver Juhler
Subject Financial regulation; Financial stability; Financial sector; Financial risks; Models
Type Working paper
Year 2017
Published 6 December 2017
Credit institutions are to an increasing extent using Contingent Convertible Bonds, CoCos, to meet part of their capital requirements. This paper provides a thorough introduction to CoCos – the product, its use in capital regulation, the market and the specific risks faced by investors. A variety of models illustrate how the complexity of CoCos makes them difficult to use when assessing the soundness of the issuer; in addition to this, the many CoCo specific risks make it questionable whether the cost of CoCos constitutes a lower bound for the cost of equity.