On the Preferences of CoCo Bond Buyers and Sellers: A Logistic Regression Analysis

Abstract

This paper estimates the preference scores of CoCo bond buyers and sellers by running logistic regressions taking into account both bond and issuing bank’s characteristics, and also considers the role of country−specific CoCo bond market competitiveness. Buyers are defined as having a preference for CoCo bonds if their return-to-risk is higher than the corresponding 25th, 50th and 75th annual percentile values; the preferences of buyers and sellers are assumed to be mutually exclusive. Differences in the degree of risk aversion of buyers and sellers and in the determinants of their preferences are found across percentiles. Further, coupon payment, conversion mechanism, credit rating and P/B ratio appear to be the strongest global determinants of CoCo bond trading between buyers and sellers, these being very responsive to CoCo bond and issuing bank’s characteristics in most European countries, Brazil, Mexico and China (especially in the UK and China).

Keywords: CoCo bonds, buyers and sellers, preference scores, logistic regressions

JEL Classification: C250, C390, F390, G110, G210, G240, G280