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Individual investors and suboptimal early exercises in the fixed-income market

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  • Eickholt, Mathias
  • Entrop, Oliver
  • Wilkens, Marco

Abstract

This paper is the first to analyze and value early exercises of Individual Investors in fixed-income investment products. Assuming decision and transaction costs we consider that a continuous decision-making on holding or exercising is not optimal anymore and propose a new approach to modeling exercise decisions, which endogenously determines the optimal decision strategy. Calibrating our model to a unique data set of about 880,000 early exercises in non-tradable putable bonds over a time period of 13 years indicates that Individual Investors (i) act very heterogeneously, (ii) behave as if they face significant individual transaction and decision costs, (iii) react sluggishly, and that (iv) exogenous effects such as taxes or investors´ desire for liquidity additionally influence early exercise behavior.

Suggested Citation

  • Eickholt, Mathias & Entrop, Oliver & Wilkens, Marco, 2014. "Individual investors and suboptimal early exercises in the fixed-income market," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 14, University of Passau, Faculty of Business and Economics.
    • Handle: RePEc:zbw:upadbr:14
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    References listed on IDEAS

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    Cited by:

    1. Eickholt, Mathias, 2014. "Behavioral financial engineering in the fixed-income market: The influence of the coupon structure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 16, University of Passau, Faculty of Business and Economics.
    2. Eickholt, Mathias & Entrop, Oliver & Wilkens, Marco, 2014. "What makes individual investors exercise early? Empirical evidence from the fixed-income market," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 15, University of Passau, Faculty of Business and Economics.

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    More about this item

    Keywords

    decision strategy; decision costs; transaction costs; putable bond;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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