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Optimal Capital Structure and Risk Management Policies of Banks That Use CoCo Futures to Hedge Financial-Sector Risk.
- Source :
- Review of Finance; Jan2024, Vol. 28 Issue 1, p235-270, 36p
- Publication Year :
- 2024
-
Abstract
- We investigate the joint optimal risk management and capital structure decisions of banks when they use contingent-convertible (CoCo) futures contracts to hedge financial-sector risk. In spite of banks choosing significantly higher leverage ratios, their default probabilities drop appreciably while their equity values increase, allowing banks to compete more favorably with the shadow-banking system. Banks' value-maximizing decision to hedge financial-sector risk unintentionally leads to an economy with extremely low aggregate bank default rates across all future states of nature. Thus, CoCo futures offer a powerful microprudential and macroprudential policy tool. That banks choose not to hedge financial-sector risk in practice is consistent with managers internalizing bank bailouts. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 15723097
- Volume :
- 28
- Issue :
- 1
- Database :
- Complementary Index
- Journal :
- Review of Finance
- Publication Type :
- Academic Journal
- Accession number :
- 174820802
- Full Text :
- https://doi.org/10.1093/rof/rfad022