Contingent capital conversion under dual asset and equity jump–diffusions

Siamak Javadi, Weiping Li and Ali Nejadmalayeri

International Review of Financial Analysis, 2023, vol. 89, issue C

Abstract: We model contingent capital with market trigger under dual jump–diffusion processes in asset values and equity prices. Under the dual jump–diffusions, we show that the conversion ratio is no longer deterministic under the jump–diffusion. The conversion ratio becomes a stochastic process related to the jump process of the underlying equity and the conditional expectation of the contingent capital at the conversion time. Thus, making the implementation of contingent capital impossible. The best we can hope to practically implement this conversion design, is to give the minimal conversion ratio (at least the portion required to convert) to conform with Basel III.

Keywords: Banking; Fixed income; Risky bonds; Contingent capital; Jumps; Market Trigger; Multiple equilibria; Conversion policy (search for similar items in EconPapers)
JEL-codes: G12 G18 G21 G31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:89:y:2023:i:c:s1057521923003149

DOI: 10.1016/j.irfa.2023.102798

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