CoCos under short-term uncertainty

Abstract

In this paper we analyze an extension of the Jeanblanc and Valchev model by considering a short-term uncertainty model with two noises. It is a combination of the ideas of Duffie and Lando (Term structure of credit spreads with incomplete accounting 25 information, Econometrica 69 (2001), pp. 633–664) and Jeanblanc and Valchev (Partial information and hazard process, Int. J. Theor. Appl. Finance 8 (2005), pp. 807#x2013;838): share quotations of the firm are available at the financial market, and these can be seen as noisy information about the fundamental value, or the firm’s asset, from which a low level produces the credit event. We assume there are also reports of the firm, release times, where this short-term uncertainty disappears. This credit event model is used to describe conversion and default in a CoCo bond.

Keywords:

• Coco bond
• partial information
• contingent convertible

AMS Subject Classifications:

• 60G99
• 91B25
• 91G40
• 93E11

Acknowledgements

This work started while visiting the Centre for Advanced Study (CAS) at the Norwegian Academy of Science and Letters. The authors would like to thank the kind hospitality offered by the members of the CAS.

Notes

No potential conflict of interest was reported by the authors.