An Experimental Analysis of Contingent Capital with Market‐Price Triggers

Douglas Davis, Oleg Korenok and Edward Prescott

Journal of Money, Credit and Banking, 2014, vol. 46, issue 5, 999-1033

Abstract: We report an experiment that evaluates three market‐based regimes for triggering the conversion of contingent capital bonds into equity: a “fixed‐trigger” regime, where a price threshold triggers mandatory conversion; a “regulator” regime, where regulators make conversion decisions based on prices; and a “prediction market” regime, where regulators also observe a market that predicts conversion. Consistent with theory, we observe inefficiencies and conversion errors in the fixed‐trigger and regulator regimes. The prediction market somewhat improves the regulator's performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.

Date: 2014
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https://doi.org/10.1111/jmcb.12132

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Working Paper: An Experimental Analysis of Contingent Capital with Market-Price Triggers (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:5:p:999-1033

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