Trigger Mechanisms of Contingent Convertible Bonds New Approaches with Simulation

Abstract

Contingent convertible bonds (CCBs), while an exciting development in finance with the potential to provide stability through capital buffers, rely on a stipulated trigger mechanism. Current research into trigger criteria shows flaws with purely market-based, book-based, or regulator-controlled mechanisms. In this work, a new market approach based on a percentage drop in a firm’s stock price over a given period as well as a novel synergy of researched triggers are explored to resolve the stated issues. Lastly, data from the 2008 Financial Crisis is applied to these new triggers to analyze the viability of CCBs in aiding in or preventing altogether a financial panic.