Callable Contingent Capital: Valuation and Default Risk

Weidong Tian ()
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Weidong Tian: Department of Finance, University of North Carolina at Charlotte, Charlotte, North Carolina 28223

Management Science, 2018, vol. 64, issue 1, 112-130

Abstract: This paper proposes the use of contingent capital with a call provision, in which the insurer has an option to redeem the contingent capital at any time. I characterize in detail a unique dynamic equilibrium of common stock, subordinated contingent capital, and a senior standard bond under a simple yet sufficient and necessary condition that can be implemented easily. I further show that the issuance of callable contingent capital does not affect the default risk of an outstanding senior standard bond. As a result, callable contingent capital provides an alternative design for contingent capital using a prudential capital structure for a bank that is “too big to fail.”

This paper was accepted by Jerome Detemple, finance

Keywords: callable contingent capital; endogenous default; equilibrium (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:1:p:112-130

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