Pricing sovereign contingent convertible debt

Andrea Consiglio (andrea.consiglio@unipa.it), Michele Tumminello and Stavros Zenios

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Abstract: We develop a pricing model for Sovereign Contingent Convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's Credit Default Swap (CDS) spread. We model CDS spread regime switching, which is prevalent during crises, as a hidden Markov process, coupled with a mean-reverting stochastic process of spread levels under fixed regimes, in order to obtain S-CoCo prices through simulation. The paper uses the pricing model in a Longstaff-Schwartz American option pricing framework to compute future state contingent S-CoCo prices for risk management. Dual trigger pricing is also discussed using the idiosyncratic CDS spread for the sovereign debt together with a broad market index. Numerical results are reported using S-CoCo designs for Greece, Italy and Germany with both the pricing and contingent pricing models.

Date: 2018-04
New Economics Papers: this item is included in nep-eec
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Citations: View citations in EconPapers (5)

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http://arxiv.org/pdf/1804.01475 Latest version (application/pdf)

Related works:
Working Paper: Pricing Sovereign Contingent Convertible Debt (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1804.01475

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