Empirical evidence on pricing of contingent convertibles
|Author:||Mgr. Petr Rýgr|
|Year:||2018 - winter|
|Leaders:|| doc. PhDr. Jozef Baruník Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||The aim of this thesis is to shed more light into practical challenges related to pricing of
contingent convertibles by empirically evaluating validity of two most crucial modelling
assumptions of contingent convertible pricing framework.
First assumption is that contractually specified capital ratio can be proxied by stock price level.
Second modelling assumption is that volatility smile characteristic for stock market can be also
incorporated into the contingent pricing model.
First assumption is tested by comparison of probability of conversion implied by balance sheet
figures with probability implied by market spreads. Analysis of our dataset indicates that
probability implied by figures reported on balance sheet of issuer is statistically higher than
probability estimated by market participants, suggesting that there is a confidence that reported
figures do not fully represent the capital position of issuer and its ability to raise additional
capital and revert the potential conversion. New information available on balance sheet also
does not tend to immediately and fully materialize in contingent convertibles market.
Secondly, incorporation of volatility smile characteristic for stock market leads to very low and
unstable trigger level compared to level implied by balance sheet.
Finally, findings collected throughout the thesis are utilized to suggest possible calibration setup
of Credit derivatives model, which is again tested empirically on our dataset and evaluated
based on various critieria.