EconPapers    
Economics at your fingertips  
 

Accounting Noise and the Pricing of Cocos

Mike Derksen, Peter Spreij and Sweder van Wijnbergen ()

No 12869, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Contingent Convertible bonds (CoCos) are debt instruments that convert into equity or are written down in times of distress. Existing pricing models assume conversion triggers based on market prices and on the assumption that markets can always observe all relevant firm information. But all Cocos issued sofar have triggers based on accounting ratios and/or regulatory intervention. We incorporate that markets receive information through noisy accounting reports issued at discrete intervals, which allows us to distinguish between market and accounting values, and between automatic triggers and regulator-mandated conversions. Our second contribution is to incorporate that coupon payments are contingent too: their payment is conditional on the maxumum Distributable Amount not being exceeded. We examine the impact of CoCo design parameters, asset volatility and accounting noise on the price of a CoCo; and investigate the interaction between CoCo design features, the capital structure of the issuing bank and their implications for risk taking and investment incentives. Finally, we use our model to explain the crash in coco prices after Deutsche Bank's profit warning february 2016.

Keywords: accounting noise; Coco design; Coco triggers; Contingent capital pricing; Investment incentives; risk taking incentives (search for similar items in EconPapers)
JEL-codes: G12 G13 G18 G21 G28 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban and nep-rmg
Date: 2018-04
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12869 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Accounting Noise and the Pricing of CoCos (2018) Downloads
Working Paper: Accounting Noise and the Pricing of Cocos (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12869

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12869

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-04-16
Handle: RePEc:cpr:ceprdp:12869