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An Experimental Analysis of Contingent Capital with Market-Price Triggers

Douglas Davis (), Oleg Korenok () and Edward Prescott ()

No 1102, Working Papers from VCU School of Business, Department of Economics

Abstract: We report an experiment that evaluates three market-based regimes for triggering the conversion of contingent capital bonds into equity: a Òfixed-triggerÓ regime, where a price threshold triggers mandatory conversion, a ÒregulatorÓ regime, where regulators make conversion decisions based on prices and a Òprediction-marketÓ 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 regulatorÕs performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.

Keywords: bank regulation; experiments; contingent capital (search for similar items in EconPapers)
JEL-codes: C92 G14 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2011-10, Revised 2013-04
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http://www.people.vcu.edu/~okorenok/repec_files/CoCo_Apr30_2013.pdf Revised Version (application/pdf)

Related works:
Journal Article: An Experimental Analysis of Contingent Capital with Market‐Price Triggers (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:vcu:wpaper:1102

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