Working Papers present research work by both Danmarks Nationalbank’s employees and our partners. Working Papers are primarily targeted at professionals and people with an interest in central banking research as well as economics and finance in a broader sense.
Working Paper: The information content in contingent convertible bond prices
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.