Contingent capital: A tale of two valuations

Surrender runs

Rising interest rates can expose life insurers to surrender risk by reducing the market value of their assets and raising policyholders'outside returns. This paper develops a minimal model of an insurance-specific run mechanism in which strategic interaction arises because early surrenders can deplete the asset pool backing continuation values. We analyze a strategic surrender game in which a run is an equilibrium outcome determined jointly by asset values, contractual surrender claims, and payoff-dependent continuation benefits. The model yields closed-form interest-rate thresholds for fundamentals-driven and self-fulfilling runs. Thinner capitalization weakly lowers the joint-surrender cutoff. Continuation benefits raise surrender thresholds but can also create strategic complementarity.

When ratios fall: A dynamic approach to contingent convertibles

We propose a novel valuation framework for contingent convertible (CoCo) bonds based on the issuing bank's Common Equity Tier 1 (CET1) ratio, which is widely acknowledged as an indicator of a bank's solvency. Our approach develops a bivariate jump-diffusion model that captures the dynamic relationship linking the CET1 ratios, share prices, and CoCo bond prices, incorporating both continuous market movements and correlated jump risk. The model advances existing literature through three key innovations: (1) a hybrid mechanism for modeling regulatory discretion in trigger decisions, (2) a class of power conversion schemes that generalizes traditional approaches while maintaining analytical tractability, and (3) a method to overcome the temporal discrepancy between high-frequency market data and low-frequency regulatory reporting. We derive semi-closed form formulas for both write-down and equity-convertible CoCo bonds and validate our model through five case studies spanning from 2009 to 2023, including an in-depth analysis of the 2023 Credit Suisse collapse. The results demonstrate a significant improvement in pricing and hedging performance while highlighting the model's data-adaptive nature that enables short-term predictions.

The Option Value of Municipal Liquidity

States and localities are relied upon to implement macroeconomic stabilization policies and ensure service delivery in times of crisis. In April 2020, the introduction of the Municipal Liquidity Facility (MLF) added an emergency lending instrument to the policy arsenal, guaranteeing liquidity, but at a price. Using a regression discontinuity design that exploits MLF lending eligibility population cutoffs, we find that the MLF contributed to the easing of liquidity pressures and reduced perceived credit risk for municipal borrowers. Low-rated issuers experienced yield reductions of at least 26 bps. We also provide suggestive evidence that these liquidity effects translated into employment gains. (JEL E58, H71, H72, H75, H77)

When subsidies build empires, not value

We examine how government subsidies alter corporate control activity in publicly traded U.S. firms. Using a panel from 2000–2022 that links Good Jobs First subsidy records with Bloomberg merger and acquisition (M&A) data, we find that subsidies increase firms’ likelihood of becoming acquirers while reducing their probability of becoming acquisition targets. Acquisitions of subsidized targets generate negative acquirer returns, indicating possible value destruction, consistent with free cash flow theory. Subsidized firms are also more likely to divest assets around M&A activity than non‐subsidized firms. Our results reveal how subsidies unintentionally alter recipient M&A incentives and dampened market discipline.

SUERF Policy Brief

Liquidity Transformation Risks in U.S. Bank Loan and High-Yield Mutual Funds: A 2026 Update

Mutual funds (MFs) and other open-ended collective investment funds engage in liquidity transformation—they offer investors daily redemptions while investing in assets that may take longer than a day to sell without significant price impact. This activity is particularly salient for corporate debt funds, where large investor redemptions during stress periods could result in fire sales that adversely affect underlying markets (see, e.g., Goldstein, Jiang, and Ng, 2017; Chernenko and Sunderam, 2020; Falato, Goldstein, and Hortaçsu, 2021; Federal Reserve Board, 2025).