Pricing securities with multiple risks: A case of exchangeable debt
Ravi S. Mateti,
Shantaram P. Hegde and
Journal of Banking & Finance, 2013, vol. 37, issue 3, 1018-1028
Building on the work of Das and Sundaram (2007), we develop a widely applicable model to price securities subject to interest rate, equity, and default risks and use it to price exchangeable bonds. The extension features a trivariate recombining lattice instead of the original model’s bivariate recombining lattice. We also show how to estimate some critical non-observable inputs to implement the model by using current market data so that the model’s prices reflect current market information. We test the model on a sample of exchangeable bonds to determine the model’s empirical performance. Besides exchangeable bonds, we can also use the model to price securities such as reverse exchangeable bonds, bonds exchangeable to indexes, and bonds exchangeable to commodities.
Keywords: Exchangeable bonds; Trivariate recombining lattice; Risk-neutral setting (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:3:p:1018-1028
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