Contagion in the CoCos Market?: A Case Study of Two Stress Events

35 Pages Posted: 22 Jun 2018

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2018

Abstract

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 analyse the dynamics of the European CoCos market during two stress episodes occurred in 2016 and 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 DB’s CoCos to the rest of the market from a CoCo-specific contagion channel. We find evidence of significant CoCo-specific contagion in the two stress episodes that could result from investors’ reassessment of CoCos’ riskiness or from uncertainty on their supervisory treatment. Moreover, we find that the CoCo-specific contagion was weaker 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.

Keywords: CoCos, Basel III, Contagion

JEL Classification: G14, G21, G28

Suggested Citation

Bologna, Pierluigi and Miglietta, Arianna and Segura, Anatoli, Contagion in the CoCos Market?: A Case Study of Two Stress Events (June 8, 2018). Available at SSRN: https://ssrn.com/abstract=3192819 or http://dx.doi.org/10.2139/ssrn.3192819

Pierluigi Bologna

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Arianna Miglietta

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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