The Determinants of CoCo Bond Prices

Abstract

This study aims to empirically test how contingent convertible (CoCo) bond prices are affected by the main theoretical determinants and design features. The theoretical framework used in this article is the Equity Derivatives Model suggested by De Spiegeleer and Schoutens (2012). The authors test for the relationship between CoCo prices and key variables suggested by this model. They find that the main determinants are mostly significant and that the explanatory power of the model is high with an R-squared of 86%. The power of the model is not affected by the loss absorption mechanism (conversion to equity or principal write-down). They also identify a number of additional explanatory variables of importance.

TOPICS: Derivatives, statistical methods