Simulation-Based Pricing of Convertible Bonds
AbstractWe propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0507015.
Length: 42 pages
Date of creation: 16 Jul 2005
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Convertible bonds; Pricing; American Options; Monte Carlo simulation;
Other versions of this item:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-18 (All new papers)
- NEP-CMP-2005-07-18 (Computational Economics)
- NEP-FIN-2005-07-18 (Finance)
- NEP-FMK-2005-07-18 (Financial Markets)
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