Callable Contingent Capital: Valuation and Default Risk

• 成果类型: Article
• 署名作者: Tian, Weidong
• 署名单位: University of North Carolina; University of North Carolina Charlotte
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2016.2573
• 发表日期: 2018
• 页码: 112-130
• 关键词: callable contingent capital; endogenous default; equilibrium

摘要

This paper proposes the use of contingent capital with a call provision, in which the insurer has an option to redeem the contingent capital at any time. I characterize in detail a unique dynamic equilibrium of common stock, subordinated contingent capital, and a senior standard bond under a simple yet sufficient and necessary condition that can be implemented easily. I further show that the issuance of callable contingent capital does not affect the default risk of an outstanding senior standard bond. As a result, callable contingent capital provides an alternative design for contingent capital using a prudential capital structure for a bank that is too big to fail.