Contingent Convertible Bonds in Financial Networks

Giovanni Calice, Carlo Sala and Daniele Tantari

Papers from arXiv.org

Abstract: We study the role of contingent convertible bonds (CoCos) in a complex network of interconnected banks. By studying the system's phase transitions, we reveal that the structure of the interbank network is of fundamental importance for the effectiveness of CoCos as a financial stability enhancing mechanism. Our results show that, under some network structures, the presence of CoCos can increase (and not reduce) financial fragility, because of the occurring of unneeded triggers and consequential suboptimal conversions that damage CoCos investors. We also demonstrate that, in the presence of a moderate financial shock, lightly interconnected financial networks are more robust than highly interconnected networks. This makes them a potentially optimal choice for both CoCos issuers and buyers.

Date: 2020-08, Revised 2023-12
New Economics Papers: this item is included in nep-fmk and nep-net
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Published in Scientific Reports 13.1 (2023): 22337

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2009.00062

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