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An Empirical Comparison of Convertible Bond Valuation Models

Author

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  • Yuriy Zabolotnyuk
  • Robert Jones
  • Chris Veld

Abstract

"This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation is 1.86% for the Ayache-Forsyth-Vetzal model, 1.94% for the Tsiveriotis-Fernandes model, and 3.73% for the Brennan-Schwartz model. For this and other measures of fit, the Ayache-Forsyth-Vetzal and Tsiveriotis-Fernandes models outperform the Brennan-Schwartz model." Copyright (c) 2010 Financial Management Association International.

Suggested Citation

  • Yuriy Zabolotnyuk & Robert Jones & Chris Veld, 2010. "An Empirical Comparison of Convertible Bond Valuation Models," Financial Management, Financial Management Association International, vol. 39(2), pages 675-706, June.
  • Handle: RePEc:bla:finmgt:v:39:y:2010:i:2:p:675-706
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1755-053X.2010.01088.x
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    Citations

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    Cited by:

    1. Jonathan A. Batten & Karren Lee-Hwei Khaw & Martin R. Young, 2014. "Convertible Bond Pricing Models," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 775-803, December.
    2. repec:eee:empfin:v:44:y:2017:i:c:p:237-249 is not listed on IDEAS
    3. Loncarski, I., 2007. "Essays on the use of convertible bonds and the security issuance decision," Other publications TiSEM a99aaa14-d375-414b-8643-6, Tilburg University, School of Economics and Management.
    4. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    5. Bruce D. Grundy & Patrick Verwijmeren, 2012. "Dividend-Protected Convertible Bonds and the Disappearance," Tinbergen Institute Discussion Papers 12-060/2/DSF37, Tinbergen Institute.
    6. Xiao, Tim, 2014. "A Simple and Precise Method for Pricing Convertible Bond with Credit Risk," MPRA Paper 53982, University Library of Munich, Germany.
    7. repec:eee:reveco:v:49:y:2017:i:c:p:1-16 is not listed on IDEAS
    8. Finnerty, John D., 2015. "Valuing convertible bonds and the option to exchange bonds for stock," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 91-115.
    9. Xiao, Tim, 2013. "Is the Jump-Diffusion Model a Good Solution for Credit Risk Modeling? The Case of Convertible Bonds," MPRA Paper 47366, University Library of Munich, Germany.
    10. Duca, Eric & Dutordoir, Marie & Veld, Chris & Verwijmeren, Patrick, 2012. "Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2884-2899.
    11. de Jong, Abe & Dutordoir, Marie & Verwijmeren, Patrick, 2011. "Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation," Journal of Financial Economics, Elsevier, vol. 100(1), pages 113-129, April.
    12. K. Milanov & O. Kounchev, 2012. "Binomial Tree Model for Convertible Bond Pricing within Equity to Credit Risk Framework," Papers 1206.1400, arXiv.org.

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