BoE paper studies CoCo effects in ‘one-shot game’
Game theoretic approach suggests CoCos cut risk-taking in certain circumstances
A new working paper, published by the Bank of England, takes a novel approach to studying the effects of contingent convertible bonds (CoCos), finding the instruments can bring benefits for financial stability.
Shareholder risk-taking incentives in the presence of contingent capital, by Mahmoud Fatouh and Ayowande McCunn, designs a simple game theoretic framework in the vein of Bengt Holmstrom and Jean Tirole’s 1998 paper. The model is a “one-shot” game that explores risk-taking incentives in
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