Pricing convertible bonds

Jonathan Batten, Karren Lee-Hwei Khaw and Martin R. Young

Journal of Banking & Finance, 2018, vol. 92, issue C, 216-236

Abstract: Convertible bonds are an important segment of the corporate bond market although their pricing is compromised by the presence of complex option features and difficulty in measuring the risk factors needed as inputs to standard valuation models. Using a unique sample of pure U.S. convertible bonds, devoid of other optionality, we show that underpricing is affected mainly by the degree of underlying asset volatility and liquidity. Convertible bonds with a greater debt component (more credit sensitive), longer time to maturity and lower quality credit ratings are also found to be more underpriced. The global financial crisis (GFC) is an episode with high-underlying asset volatility and one subject to short-selling constraints. During this period there was deep convertible bond discounting, which highlights the importance of market conditions and the temporal, rather than systematic, nature of the pricing errors.

Keywords: Convertible bonds; Global financial crisis; Pricing; Stochastic volatility; Real-time trade prices; Liquidity (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426618301006
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:92:y:2018:i:c:p:216-236

DOI: 10.1016/j.jbankfin.2018.05.006

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().