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An Uncertain Volatility Explanation for Delayed Calls of Convertible Bonds


  • Ali Bora Yigibasioglu

    () (ICMA Centre, University of Reading)

  • Carol Alexandra

    () (ICMA Centre, University of Reading)


Arbitrage-free price bounds for convertible bonds are obtained assuming a stochastic volatility process for the common stock that lies within a band but makes few other assumptions about volatility dynamics. Equity-linked hazard rates, stochastic interest rates and different assumptions about default and recovery behavior are accommodated within this approach. A non-linear multi-factor reduced-form equity-linked default model leads to a set of non-linear partial differential complementarity equations that are governed by the volatility path. Empirical results focus on call notice period effects, showing that uncertain volatility can capture the call premia so often observed in issuer’s call policies. Increasingly pessimistic values for the issuer’s substitution asset obtain as we introduce more uncertainty during the notice period. Volatility uncertainty is thus a useful mechanism to explain issuers delayed call policies.

Suggested Citation

  • Ali Bora Yigibasioglu & Carol Alexandra, 2004. "An Uncertain Volatility Explanation for Delayed Calls of Convertible Bonds," ICMA Centre Discussion Papers in Finance icma-dp2004-07, Henley Business School, Reading University.
  • Handle: RePEc:rdg:icmadp:icma-dp2004-07

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    References listed on IDEAS

    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
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    6. Ingersoll, Jonathan E, Jr, 1977. "An Examination of Corporate Call Policies on Convertible Securities," Journal of Finance, American Finance Association, vol. 32(2), pages 463-478, May.
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    Cited by:

    1. Zhou, Qi-Yuan & Wu, Chong-Feng & Feng, Yun, 2007. "Decomposing and valuing callable convertible bonds: a new method based on exotic options," MPRA Paper 7421, University Library of Munich, Germany.

    More about this item


    call notice period; call premium; convertible bond; delayed calls; equity-linked default; stochastic interest rates; volatility uncertainty;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing


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