The information content in contingent convertible bond prices

Credit institutions are to an increasing extent using Contingent Convertible Bonds (CoCos) to meet part of their capital requirements, which could suggest that the market for CoCos contains useful information on the robustness of the issuer. This paper gives a thorough introduction to CoCos - the product, its use in capital regulation, the market and the specific risks faced by investors. To illustrate which information potentially can be extracted from the price level and change in prices of CoCos, we introduce models which incorporate most of the characteristics and risks of CoCos. The models illustrate how the complexity of CoCos makes them difficult to use when assessing the soundness of the issuer; in addition to this the many CoCospecific risks make it questionable whether the cost of CoCos constitutes a lower bound for the cost of equity.