Pricing Sovereign Contingent Convertible Debt

The Wharton Financial Institutions Center WP 16-05

32 Pages Posted: 25 Jul 2016 Last revised: 17 Apr 2018

See all articles by Andrea Consiglio

Andrea Consiglio

University of Palermo - d/SEAS

Michele Tumminello

University of Palermo; Carnegie Mellon University - Department of Social and Decision Sciences

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: November 2017

Abstract

We develop a pricing model for sovereign contingent convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's credit default swap CDS spread. One innovation is the modeling of CDS spread regime switching which is prevalent during crises. Regime switching is modeled as a hidden Markov process and is integrated with a stochastic process of spread levels to obtain S-CoCo prices through simulation. The paper goes a step further and uses the pricing model in a Longstaff-Schwartz. American option pricing framework to compute state contingent S-CoCo prices at some risk horizon, thus facilitating risk management. Dual trigger pricing is also discussed using the idiosyncratic CDS spread for the sovereign debt together with a broad market index. Extensive numerical results are reported using S-CoCo designs for Greece, Italy and Germany with both the pricing and contingent pricing models.

Keywords: contingent bonds, sovereign debt, debt restructuring, state-contingent pricing, regime switching, credit default swaps

JEL Classification: C61, C63, D61,E3, E47, E62, F34, G21, G38, H63

Suggested Citation

Consiglio, Andrea and Tumminello, Michele and Zenios, Stavros A., Pricing Sovereign Contingent Convertible Debt (November 2017). The Wharton Financial Institutions Center WP 16-05. Available at SSRN: https://ssrn.com/abstract=2813427 or http://dx.doi.org/10.2139/ssrn.2813427

Andrea Consiglio

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

HOME PAGE: http://portale.unipa.it/persone/docenti/c/andrea.consiglio

Michele Tumminello

University of Palermo ( email )

Viale delle Scienza
Palermo, Palermo 90128
Italy

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Register to save articles to
your library

Register

Paper statistics

Downloads
98
Abstract Views
662
rank
267,110
PlumX Metrics