Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models

Posted: 27 Feb 2013

See all articles by Damiano Brigo

Damiano Brigo

Imperial College London - Department of Mathematics

Joao Garcia

Fitch Solutions

Nicola Pede

Imperial College London - Department of Mathematics

Date Written: February 27, 2013

Abstract

After the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on Capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this Contingent Capital (or Coco) bond instrument and presents a pricing methodology based on firm value models. The model is calibrated to readily available market data. A stress test of model parameters is illustrated to account for potential model risk. Finally, a brief overview of how the instrument performs is presented.

Keywords: Contingent Capital, CoCo Bonds, AT1P model, Firm Value Models, Credit Default Swap Calibration, Conversion Time, Default Time, Hybrid Credit-Equity Products, Basel III, Systemic Risk

JEL Classification: G13

Suggested Citation

Brigo, Damiano and Crispiniano Garcia, Joao Batista and Pede, Nicola, Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models (February 27, 2013). Available at SSRN: https://ssrn.com/abstract=2225545 or http://dx.doi.org/10.2139/ssrn.2225545

Damiano Brigo (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/damiano.brigo

Joao Batista Crispiniano Garcia

Fitch Solutions ( email )

United Kingdom

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

Nicola Pede

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

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