Pricing Hybrid Securities: The Case of Malaysian ICULS
AbstractThis paper provides an indepth analysis of Irredeemable Convertible Unsecured Loan Stocks or ICULS. A Malaysian variant of the convertible bond, ICULS are a hybrid security. Despite their introduction and trading since the late 1980’s, not much work have been done on them. This paper presents the first empirical evidence on the pricing of ICULS. We propose a pricing model for ICULS, built on the replication technique of options. Using 30 months (2½ years) of daily price data, we test our model on a sample of 34 ICULS. Though on average ICULS are underpriced by 2.3%, we find an equal number of under and overpriced ICULS. Our findings show that not only does the market misprice ICULS, the mispricing is sustained over quite a while. Infact, even over a one year window period, marginal mispricing remains. We argue that issuers of ICULS benefit much more than investors do.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 12764.
Date of creation: 2004
Date of revision: Jun 2004
Publication status: Published in The Journal of International Finance 3.16(2004): pp. 3154-3172
Pricing of Hybrid Securities; Irredeemable Convertible Unsecured Loan Stocks or ICULS; Option Pricing; Pricing Efficiency;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G19 - Financial Economics - - General Financial Markets - - - Other
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- Ammann, Manuel & Kind, Axel & Wilde, Christian, 2003. "Are convertible bonds underpriced? An analysis of the French market," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 635-653, April.
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