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.
Authors� Note: The views expressed in this article are those of the authors and do not necessarily reflect the views and policies of BNP Paribas.
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