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Contingent Convertibles with Stock Price Triggers: The Case of Perpetuities

Author

Listed:
  • George Pennacchi

    (University of Illinois)

  • Alexei Tchistyi

    (University of Illinois)

Abstract

Initial proposals for bank contingent convertibles (CoCos) envisioned that these bonds would convert to equity when the bank's stock price declined to a pre-specifi ed trigger. Subsequent research claimed that doing so causes the stock price to have multiple equilibria or no equilibrium. We show that when CoCos are perpetuities, which characterizes most actual CoCos, a unique stock price equilibrium exists except under unrealistic conditions. Unique equilibria occur when conversion favors or disfavors CoCo investors, when CoCos convert to equity or are written down, and when CoCos are callable. We also analyze a banks choice of risk before and after conversion.

Suggested Citation

  • George Pennacchi & Alexei Tchistyi, 2018. "Contingent Convertibles with Stock Price Triggers: The Case of Perpetuities," 2018 Meeting Papers 331, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:331
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    References listed on IDEAS

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    2. Giovanni Calice & Carlo Sala & Daniele Tantari, 2020. "Contingent Convertible Bonds in Financial Networks," Papers 2009.00062, arXiv.org, revised Dec 2023.
    3. Mr. Andre O Santos, 2019. "Can Contingent Convertibles Help Private Asset Managers Fund Their Acquisition of Non-Performing Loans from Portuguese Banks?," IMF Working Papers 2019/099, International Monetary Fund.
    4. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    5. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    6. Roman Goncharenko, 2022. "Fighting Fire with Gasoline: CoCos in Lieu of Equity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 493-517, March.
    7. Christian Koziol & Sebastian Weitz, 2021. "Does model complexity improve pricing accuracy? The case of CoCos," Review of Derivatives Research, Springer, vol. 24(3), pages 261-284, October.

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