Individual investors and suboptimal early exercises in the fixed-income market

Mathias Eickholt, Oliver Entrop and Marco Wilkens

No 14, Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe from University of Passau, Faculty of Business and Economics

Abstract: This paper is the first to analyze and value early exercises of Individual Investors in fixed-income investment products. Assuming decision and transaction costs we consider that a continuous decision-making on holding or exercising is not optimal anymore and propose a new approach to modeling exercise decisions, which endogenously determines the optimal decision strategy. Calibrating our model to a unique data set of about 880,000 early exercises in non-tradable putable bonds over a time period of 13 years indicates that Individual Investors (i) act very heterogeneously, (ii) behave as if they face significant individual transaction and decision costs, (iii) react sluggishly, and that (iv) exogenous effects such as taxes or investors´ desire for liquidity additionally influence early exercise behavior.

Keywords: decision strategy; decision costs; transaction costs; putable bond (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:upadbr:14

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