Simulation-Based Pricing of Convertible Bonds

Manuel Ammann, Axel Kind and Christian Wilde
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Axel Kind: University of St. Gallen

Finance from University Library of Munich, Germany

Abstract: We propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.

Keywords: Convertible bonds; Pricing; American Options; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-07-16
New Economics Papers: this item is included in nep-cmp, nep-fin and nep-fmk
Note: Type of Document - pdf; pages: 42
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Simulation-based pricing of convertible bonds (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0507015

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