Convertible bond valuation with regime switching

Byung-June Kim and Bong-Gyu Jang

Chaos, Solitons & Fractals, 2021, vol. 150, issue C

Abstract: We present a valuation formula for convertible bonds with regime-switching market conditions by decomposing the convertible bond into a coupon-bearing bond and the American-type exchange option. A coupon-bearing bond component is modeled with a four-factor model: a two-factor affine model for the risk-free rate and a two-factor affine model with stochastic volatility for the credit spreads on the coupon-bearing bond component. We also derive a new valuation formula for the American-type exchange option component.

Keywords: Option pricing; Convertible bond; Regime switching; Exchange option (search for similar items in EconPapers)
JEL-codes: C29 G12 G13 G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:150:y:2021:i:c:s0960077921005555

DOI: 10.1016/j.chaos.2021.111201

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