Network Valuation under Equity Conversions

31 Pages Posted: 5 Sep 2018 Last revised: 2 Dec 2018

See all articles by Matias Puig

Matias Puig

University of Oxford - Mathematical Institute

Christoph Siebenbrunner

University of Oxford - Mathematical Institute

Date Written: August 3, 2018

Abstract

We build on the literature on financial contagion using models of cross-holdings of equity participations and debt in different seniority classes, and extend them to include bail-ins and contingent convertible debt instruments, two mechanisms of debt-to-equity conversion. We combine these with recently proposed methods of network valuation under stochastic external assets, allowing for the pricing of debt instruments in each seniority layer and the calculation of default probabilities. We show that there exist well-defined valuations for all financial assets cross-held within the system. We provide Matlab implementations of all the algorithms.

Keywords: asset pricing, contingent convertible securities, financial regulation, systemic risk

Suggested Citation

Puig, Matias and Siebenbrunner, Christoph, Network Valuation under Equity Conversions (August 3, 2018). Available at SSRN: https://ssrn.com/abstract=3225943 or http://dx.doi.org/10.2139/ssrn.3225943

Matias Puig

University of Oxford - Mathematical Institute ( email )

Andrew Wiles Building
Radcliffe Observatory Quarter (550)
Oxford, OX2 6GG
United Kingdom

Christoph Siebenbrunner (Contact Author)

University of Oxford - Mathematical Institute ( email )

Andrew Wiles Building,
Radcliffe Observatory Quarter, Woodstock Rd
Oxford, OX2 6GG
United Kingdom

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