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Bank risk‐taking and market discipline: Evidence from CoCo bonds in Korea

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  • Younghwan Lee
  • Haerang Park

Abstract

We investigate whether the risk profile of contingent convertible (CoCo) bonds is well‐priced by testing the sensitivity of bond spreads to bank asset volatility. While equity holders (bankers) have an incentive to make riskier investments to trigger the write‐off, such risk‐taking behavior can be contained if CoCo bond investors punish it by demanding higher returns. We have found that investors in the Korean financial market understand the risk profile of CoCo bonds and require higher returns for the additional bank risk, which suggests the presence of market discipline with regard to CoCo bonds.

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  • Younghwan Lee & Haerang Park, 2020. "Bank risk‐taking and market discipline: Evidence from CoCo bonds in Korea," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 885-894, June.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:6:p:885-894
    DOI: 10.1002/fut.22097
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    1. Yang, Bo & Gan, Liu, 2021. "Contingent capital, Tobin’s q and corporate capital structure," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    2. Liu, Liang-Chih & Dai, Tian-Shyr & Zhou, Lei, 2024. "On the design of bail-in-able bonds from the perspective of non-financial firms," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1136-1155.

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