Contagion in the CoCos market? A case study of two stress events

The post-crisis regulatory framework has fostered the development of the market for contingent convertible bonds (CoCos). These instruments allow for loss absorption as a going concern, but their critics warn about their potential destabilizing effects in stress situations. We analyze the dynamics of the European CoCos market during two stress episodes that occurred in 2016 and were triggered by news on substantial unexpected losses faced by a European systemic bank. Our econometric approach aims at disentangling the fundamental contagion channels of the distress of such bank to the rest of the market from a potential CoCo-specific contagion channel. We find evidence of significant CoCo-specific contagion in the first stress episode that could result from investors' reassessment of CoCos' riskiness or from uncertainty on their supervisory treatment. We do not find instead evidence of CoCospecific contagion in the second stress event, suggesting that as investors learn about the specificities of these instruments and their supervisory treatment, the CoCos market becomes more resilient.(This abstract was borrowed from another version of this item.)