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An Experimental Analysis of Contingent Capital with Market-Price Triggers

Author

Listed:
  • Douglas D. Davis

    (Department of Economics, VCU School of Business)

  • Korenok Oleg

    (Department of Economics, VCU School of Business)

  • Edward S. Prescott

    (Federal Reserve Bank of Richmond)

Abstract
We report an experiment that evaluates three market-based regimes for triggering the conversion of contingent capital bonds into equity: a Òfixed-triggerÓ regime, where a price threshold triggers mandatory conversion, a ÒregulatorÓ regime, where regulators make conversion decisions based on prices and a Òprediction-marketÓ regime, where regulators also observe a market that predicts conversion. Consistent with theory, we observe inefficiencies and conversion errors in the fixed-trigger and regulator regimes. The prediction market somewhat improves the regulatorÕs performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.

Suggested Citation

  • Douglas D. Davis & Korenok Oleg & Edward S. Prescott, 2011. "An Experimental Analysis of Contingent Capital with Market-Price Triggers," Working Papers 1102, VCU School of Business, Department of Economics, revised Apr 2013.
    • Handle: RePEc:vcu:wpaper:1102
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    File URL: http://www.people.vcu.edu/~okorenok/repec_files/CoCo_Apr30_2013.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Douglas Davis & Edward Simpson Prescott, 2017. "Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 33-71, June.
    2. Edward Simpson Prescott, 2012. "Contingent capital: the trigger problem," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(1Q), pages 33-50.
    3. Gupta, Aparna & Wang, Runzu & Lu, Yueliang, 2021. "Addressing systemic risk using contingent convertible debt – A network analysis," European Journal of Operational Research, Elsevier, vol. 290(1), pages 263-277.
    4. Te Bao & Edward Halim & Charles N. Noussair & Yohanes E. Riyanto, 2021. "Managerial incentives and stock price dynamics: an experimental approach," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 617-648, June.
    5. Caporale, Guglielmo Maria & Kang, Woo-Young, 2021. "On the preferences of CoCo bond buyers and sellers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    6. Weber, Matthias & Duffy, John & Schram, Arthur, 2024. "Regulation and the demand for credit default swaps in experimental bond markets," European Economic Review, Elsevier, vol. 165(C).
    7. Ahrash Dianat & Christoph Siemroth, 2021. "Improving decisions with market information: an experiment on corporate prediction markets," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 143-176, March.
    8. Weidong Tian, 2018. "Callable Contingent Capital: Valuation and Default Risk," Management Science, INFORMS, vol. 64(1), pages 112-130, January.
    9. Davis, Douglas D. & Korenok, Oleg & Lightle, John P., 2022. "Liquidity regulation, banking history and financial fragility: An experimental examination," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1372-1383.
    10. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.

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    More about this item

    Keywords

    bank regulation; experiments; contingent capital;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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