We investigate whether the risk profile of contingent convertible (CoCo) bonds is well-priced by testing the sensitivity of bond spreads to bank asset volatility.While equity holders (bankers) have an incentive to make riskier investments to trigger the write-off, such risk-taking behavior can be contained if CoCo bond investors punish it by demanding higher returns. We have found that investors in the Korean financial market understand the risk profile of CoCo bonds and require higher returns for the additional bank risk, which suggests the presence of market discipline with regard to CoCo bonds.
K E Y W O R D Sbank risk-taking, contingent convertible bonds, market discipline
This study examines the pricing behavior of banks in the mortgage loan market. Firstly, the paper compares the loan pricing behavior of banks between two periods, one of which is marked as a more competitive state due to regulatory intervention. Secondly, the paper also test for the stock market reaction to model‐implied collusive profits. Using data from banks in Korea, the paper find that mortgage loan rates are more consistent with cooperative pricing behavior than independent pricing behavior in the period from 2006 to 2012.
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