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Capital Structure Models and Contingent Convertible Securities

Author

Listed:
  • Di Meng

    (Department of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

  • Adam Metzler

    (Department of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

  • R. Mark Reesor

    (Department of Mathematics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

Abstract

We implemented a methodology to calibrate capital structure models for banks that have issued contingent convertible securities (CoCos). Typical studies involving capital structure model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. From a theoretical perspective, we found that jumps in the asset value process were necessary to obtain a satisfactory fit to the market data. In practice, contingent capital conversion triggers are discretionary, and there is considerable uncertainty around when regulators are likely to enforce conversion. The market-implied conversion triggers we obtain indicate that the market expects regulators to enforce conversion while the issuing bank is a going concern, as opposed to a gone concern. This fact is presumably of interest to potential dealers, regulators, issuers, and investors.

Suggested Citation

  • Di Meng & Adam Metzler & R. Mark Reesor, 2024. "Capital Structure Models and Contingent Convertible Securities," Risks, MDPI, vol. 12(3), pages 1-35, March.
  • Handle: RePEc:gam:jrisks:v:12:y:2024:i:3:p:55-:d:1359001
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    References listed on IDEAS

    as
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