Addressing systemic risk using contingent convertible debt – A network analysis
Runzu Wang and
European Journal of Operational Research, 2021, vol. 290, issue 1, 263-277
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:290:y:2021:i:1:p:263-277
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