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Seminar
Department of Systems Engineering and Engineering Management
The Chinese
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Title |
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CoCos, Bail-In, and Tail Risk
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Speaker |
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Prof. Chen Nan |
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Date |
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September 14th, 2012 (Friday) |
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4:30 p.m. - 5:30 p.m. |
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Venue |
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Room 513 |
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William M.W. Mong Engineering Building |
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(Engineering Building Complex Phase 2) |
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CUHK |
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Abstract:
We derive closed-form expressions to value the firm and its liabilities, and we use these to investigate how CoCos affect debt overhang, asset substitution, the firm\'s ability to absorb losses, the sensitivity of equity holders to various types of risk, and how these properties interact with the firm\'s debt maturity profile, the tax treatment of CoCo coupons, and the pricing of deposit insurance. We examine the effects of varying the two main design features of CoCos, the conversion trigger and the conversion ratio, and we compare the effects of CoCos with the effects of reduced bankruptcy costs through orderly resolution. Across a wide set of considerations, we find that CoCos generally have positive incentive effects when the conversion trigger is not set too low.
The debt tax shield and tail risk in the firm\'s income and asset value have particular impact on the effects of CoCos. We also identify a phenomenon of debt-induced collapse that occurs when a firm issues CoCos and then takes on excessive additional debt: the added debt burden can induce equity holders to raise their default barrier above the conversion trigger, effectively changing CoCos to junior straight debt; equity value experiences a sudden drop at the point at which this occurs. Finally, we calibrate the model to past data on specific banks to see what impact CoCos might have had on the financial crisis.
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Biography:
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************************* ALL ARE WELCOME ************************
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Host |
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Prof. Hong Cheng |
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Enquiries |
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Prof. Nan Chen or Prof. Sean X. Zhou |
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Department of Systems Engineering and Engineering Management |
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CUHK |
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