AFFI International Conference 2017

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Structural Pricing of CoCos and Deposit Insurance with Regime Switching and Jumps

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This article presents a structural model with jumps and regime switching features that is specifically dedicated to the pricing of bank contingent convertible debt (CoCos) and deposit insurance. This model assumes that the assets of a bank evolve as a geometric regime switching double exponential jump diffusion and that debt profiles are exponentially decreasing with respect to maturity. The paper starts by giving a general presentation of the jumps and regime switching framework, where an emphasis is put on the definition of an Esscher transform applicable to regime switching double exponential jump diffusions. The following developments concentrate on the definition and implementation of a matrix Wiener-Hopf factorization associated with the latter processes. Then, valuation formulas for the bank equity, debt, deposits, CoCos and deposit insurance are obtained. An illustration concludes the paper and addresses the respective impacts of jumps and regime switching on the viability of the bank.


Olivier Le Courtois    
EM Lyon Business School

Xiaoshan Su    
Beihang University


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