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Convertible bond valuation with regime switching

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  • Kim, Byung-June
  • Jang, Bong-Gyu

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.

Suggested Citation

  • Kim, Byung-June & Jang, Bong-Gyu, 2021. "Convertible bond valuation with regime switching," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:chsofr:v:150:y:2021:i:c:s0960077921005555
    DOI: 10.1016/j.chaos.2021.111201
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    References listed on IDEAS

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    More about this item

    Keywords

    Option pricing; Convertible bond; Regime switching; Exchange option;
    All these keywords.

    JEL classification:

    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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