Steering a Bank Around a Death Spiral: Multiple Trigger CoCos

16 Pages Posted: 26 Dec 2011

See all articles by Jan De Spiegeleer

Jan De Spiegeleer

RiskConcile

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: December 10, 2011

Abstract

In this paper we start with the introduction of two pricing models to value contingent convertibles. One model ("rule of thumb") has its roots in credit derivatives pricing while the second model implements an equity derivatives approach. From these models we then quantify the equity sensitivity and the negative gamma resulting from the design of a contingent convertible and illustrate the possible pitfalls of a death spiral on the share price. We conclude that moving away from one large single CoCo issue towards more but smaller issues with accounting triggers spread across an extended range, will alleviate the death spiral risk.

Keywords: Contingent Capital, CoCo, Death Spiral

JEL Classification: G12, G13, G18, G21, G28, G32

Suggested Citation

De Spiegeleer, Jan and Schoutens, Wim, Steering a Bank Around a Death Spiral: Multiple Trigger CoCos (December 10, 2011). Available at SSRN: https://ssrn.com/abstract=1976985 or http://dx.doi.org/10.2139/ssrn.1976985

Jan De Spiegeleer (Contact Author)

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HOME PAGE: http://www.riskconcile.com

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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