6533b82cfe1ef96bd128feb4
RESEARCH PRODUCT
Pricing Sovereign Contingent Convertible Debt
Michele TumminelloMichele TumminelloStavros A. ZeniosAndrea Consigliosubject
021103 operations researchCredit default swapbusiness.industryFinancial economicsmedia_common.quotation_subject05 social sciences0211 other engineering and technologies02 engineering and technologyPaymentStock market indexDebt restructuringValuation of options0502 economics and businessEconomics050207 economicsRational pricingbusinessConvertible bondRisk managementmedia_commondescription
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.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2016-01-01 | SSRN Electronic Journal |