Pricing contingent convertible bonds: An analytical approach based on two-dimensional stochastic processes

Abstract

In this paper, we study fast pricing methods for contingent convertible bonds (CoCos). Based on two-dimensional stochastic processes, we propose two pricing models for CoCos: a dynamic capital-ratio model and a dynamic debt-equity model. Under these frameworks, we derive analytic-form formulae for CoCos with fixed and floored conversion prices. Many practical implications for analyzing CoCos are observed through numerical tests by choosing the plausible model parameters obtained from empirical results. (C) 2018 Elsevier B.V. All rights reserved.