Research On The CoCos Pricing With Post-Positional Write-Down Provision

The 2007 subprime mortgage crisis aroused the public attention of the systemic financialrisk once again,most countries and financial institutions tended to seek a new product which could timely and effectively improve the bank capital structure and share the burden of government bailout,thus Contingent Convertible Bonds,short for Co Cos,with the predesign of being capable of converting debt to equity in the crisis to provide liquidity,is regarded as one of the important tools to solve the “Too Big to Fail” problem.To deal with manipulative behavior which prevents to realize the participants 'incentive compatibility,on the basis of Co Cos,this paper adds a Post-Positional Write-Down provision,and then forms PWDCs(Post-Positional Write-Down Co Cos).Specifically,with two triggers underlying issuing bank share price,if the price first drop to the trigger 1,part of PWDCs debt will be converted to stocks,if the price continue to fall to trigger 2,certain proportion of debt will be returned as cash and the left debt principal will be written down.Considering different future states,this paper introduces Jarrow-Turnbull model to determine the PWDCs' s survival probability correspondingly,and solve part important parameters which affect manipulative behavior by minimizing the variance of the PWDCs' value.At the last part,this paper conducts a numerical simulation analysis based on the product Buffer Capital Note(BCN)issued by Credit Suisse Group in 2011.The results show that: The pricing result of PWDCs is lower than common bonds price,so the investor can hold PWDCs with less cost;The PWDCs' price is positively related to the conversion coefficient,negatively related to the conversion intensity,and it is convex function of risk-free interest rate;With the design of optimal conversion coefficient and like,it is promising to control manipulative behavior and realize the participants' incentive compatibility.This paper is of the following contribution: Design a new kind of Co Cos with Post-Positional Write-Down provision to control manipulative behavior and promote to realize incentive compatibility between investors and bank;Apply J-T model to determine the PWDCs' survival probability under different states and hence get the pricing of PWDCs;Solve important parameters by minimize the variance of the PWDCs' value to provide certain decision basis for incentive compatibility provision design.