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<p>This paper develops a general Lévy framework to reduce the pricing problem of contingent convertible (CoCo) bonds to the problem of the first passage time of the triggering process. We consider two Lévy models driven by the derived Brownian motion and the spectrally negative Lévy process. These two Lévy models keep the form of the Lévy process unchanged under the measure transform. We use single and double Laplace transforms combined with numerical Fourier inversion to find closed-form expressions for the price of CoCo bonds. The results show that the model driven by the spectrally negative Lévy process would provide a more accurate CoCo bond price when considering the phenomenon of jumps in the financial market. Indeed, negative jumps play a critical role in the pricing of CoCo bonds. This paper underlines the importance of the CoCo bonds valuation using the Lévy process.</p>

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First Passage Time Model Based on Lévy Process for Contingent Convertible Bond Pricing

  • 期刊论文

  • 发表日期：

    2025年5月6日

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  • Asma Khadimallah,
  • Fathi Abid

摘要

This paper develops a general Lévy framework to reduce the pricing problem of contingent convertible (CoCo) bonds to the problem of the first passage time of the triggering process. We consider two Lévy models driven by the derived Brownian motion and the spectrally negative Lévy process. These two Lévy models keep the form of the Lévy process unchanged under the measure transform. We use single and double Laplace transforms combined with numerical Fourier inversion to find closed-form expressions for the price of CoCo bonds. The results show that the model driven by the spectrally negative Lévy process would provide a more accurate CoCo bond price when considering the phenomenon of jumps in the financial market. Indeed, negative jumps play a critical role in the pricing of CoCo bonds. This paper underlines the importance of the CoCo bonds valuation using the Lévy process.