DP10996 The Determinants of CoCo Bond Prices

Author(s): Sara Abed Masror Khah, Theo Vermaelen, Christian C Wolff
Publication Date: December 2015
Keyword(s): contingent capital bonds
JEL(s): G2
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10996

[THIS PAPER HAS BEEN WITHDRAWN AT THE REQUEST OF THE AUTHORS. AN UP TO DATE VERSION IS FORTHCOMING IN THE JOURNAL OF DERIVATIVES] This study aims to empirically test the theoretical and financial determinants of contingent convertible (CoCo) bond prices. These determinants can be identified based on the theoretical framework and also CoCo?s anatomy. Here, we use two broad pricing approaches namely Merton and Equity Derivatives Models. For this purpose, we carry out regression analyses on relationship between coco price and key variables suggested by financial theory. The explanatory power of the determinants can be tested using the reported R-squared. If the explanatory power is relatively high, we can conclude that the variable drawn from the theory is clearly important in explaining the pricing of this new asset class. We find that the significance of estimated coefficients are highly consistent with theory. Our results indicate that both Models perform well in CoCo pricing context. Our findings also show that including additional control variables do not considerably improve the predictability power of the above mentioned models