Pricing Sovereign Contingent Convertible Debt

Andrea Consiglio, Michele Tumminello and Stavros Zenios
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Andrea Consiglio: University of Palermo
Michele Tumminello: University of Palermo

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We develop a pricing model for sovereign contingent convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's credit default swap CDS spread. One innovation is the modeling of CDS spread regime switching which is prevalent during crises. Regime switching is modeled as a hidden Markov process and is integrated with a stochastic process of spread levels to obtain S-CoCo prices through simulation. The paper goes a step further and uses the pricing model in a Longsta-Schwartz. American option pricing framework to compute state contingent S-CoCo prices at some risk horizon, thus facilitating risk management. Dual trigger pricing is also discussed using the idiosyncratic CDS spread for the sovereign debt together with a broad market index. Extensive numerical results are reported using S-CoCo designs for Greece, Italy and Germany with both the pricing and contingent pricing models.

Date: 2016-07
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: PRICING SOVEREIGN CONTINGENT CONVERTIBLE DEBT (2018)
Journal Article: PRICING SOVEREIGN CONTINGENT CONVERTIBLE DEBT (2018)
Working Paper: Pricing sovereign contingent convertible debt (2018)
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