Utility indifference pricing of convertible bonds

Jian Liu (), Mengxian Tao, Chaoqun Ma () and Fenghua Wen ()
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Jian Liu: School of Economics and Management, Changsha University of Science and Technology, Changsha 410004, P. R. China
Mengxian Tao: School of Economics and Management, Changsha University of Science and Technology, Changsha 410004, P. R. China
Chaoqun Ma: Business School, Hunan University, Changsha 410082, P. R. China
Fenghua Wen: Business School, Central South University, Changsha 410083, P. R. China;

International Journal of Information Technology & Decision Making (IJITDM), 2014, vol. 13, issue 02, 429-444

Abstract: We propose a pricing model for convertible bonds based on the utility-indifference method and get access to the empirical results by use of Information Technology. By using the stochastic control theory, the general expression of utility indifference price on convertible bonds is obtained under the CIR interest rate model. Furthermore, using the proposed theoretical model, we present an empirical pricing study of China's market, using three convertible bonds and more than 70 months of daily market prices. The parameters value is estimated by the maximum likelihood method, and the prices of convertible bonds are simulated by the Monte Carlo approach. The empirical results indicate that the theoretical prices are higher than the actual market prices 0.24–4.58%, and the utility indifference prices are better than the Black–Scholes (BS) prices.

Keywords: Convertible bonds; utility indifference pricing; CIR interest rate; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219622014500527

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