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Addressing systemic risk using contingent convertible debt – A network analysis

Aparna Gupta, Runzu Wang and Yueliang Lu

European Journal of Operational Research, 2021, vol. 290, issue 1, 263-277

Abstract: We construct a balance sheet network model to study the interconnectedness of a banking system. A simulation analysis of the buffer effect of contingent convertible (CoCo) debt in controlling contagion in a theoretical banking network model is followed by calibrating the model using 13F filings. We find that CoCo debt conversion significantly mitigates systemic risk, with a dual-trigger CoCo debt design being more effective in protecting the surviving banks. A two-tranche CoCo debt design combines the benefits of single and dual-trigger CoCo debt. The trade-offs in different designs of CoCo triggers can be evaluated in a network simulation model, as developed in this work.

Keywords: Finance; Contingent convertible debt; Systemic risk; 13F filings; Network model; Simulation analysis (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:290:y:2021:i:1:p:263-277

DOI: 10.1016/j.ejor.2020.07.062

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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