Contingent Convertible (CoCo) Bonds: A First Empirical Assessment of Selected Pricing Models

Abstract

This study is the first to assess selected pricing models for contingent convertible (CoCo) bonds empirically. Substantial amounts of these instruments have recently been issued by a number of banks. The authors’ analysis shows that although all tested approaches—a structural model, an equity derivatives model, and a credit derivatives model—largely fit market prices, they exhibit biases in derived hedge ratios. The equity derivatives model is the most practical for the pricing and risk management of CoCo bonds.