Capital Structural Models and Contingent Convertible Securities

63 Pages Posted: 8 Feb 2024

See all articles by Di Meng

Di Meng

Wilfrid Laurier University - Department of Mathematics

Adam Metzler

Wilfrid Laurier University - Department of Mathematics

R. Mark Reesor

Wilfrid Laurier University; University of Western Ontario

Date Written: January 18, 2024

Abstract

We implement a methodology to calibrate capital structural models for financial firms that have issued contingent convertible securities (CoCo). Typical studies involving capital structural model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. From a theoretical perspective, we find that jumps in the asset-value process are necessary to obtain a satisfactory fit to market data. In practice, contingent capital conversion triggers are discretionary, and there is considerable uncertainty around when regulators are likely to enforce conversion. The market-implied conversion triggers we obtain indicate that the market expects regulators to enforce conversion while the issuing firm is a going concern, as opposed to a gone concern. This fact would presumably be of interest to potential CoCo investors.

Keywords: Capital structural model, Contingent Convertible Securities, Discontinuous asset value process, Calibration

Suggested Citation

Meng, Di and Metzler, Adam and Reesor, R. Mark, Capital Structural Models and Contingent Convertible Securities (January 18, 2024). Available at SSRN: https://ssrn.com/abstract=4699533 or http://dx.doi.org/10.2139/ssrn.4699533

Di Meng (Contact Author)

Wilfrid Laurier University - Department of Mathematics ( email )

Waterloo, Ontario
Canada

Adam Metzler

Wilfrid Laurier University - Department of Mathematics ( email )

Canada

R. Mark Reesor

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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