An Empirical Comparison of Convertible Bond Valuation Models

Abstract

An Empirical Comparison of Convertible Bond Valuation ModelsThis paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) 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 (2003)

Convertible Bond Valuation Model

“…Unlike other studies that use bond spreads for pricing (see Tsiveriotis and Fernandes (1998), Ammann et al (2003), Zabolotnyuk et al (2010), etc. ), we perform risky valuation based on credit information extracted from CDS spreads.…”

A simple and precise method for pricing convertible bond with credit risk

“…Unlike other studies that use bond spreads for pricing (see Tsiveriotis and Fernandes (1998), Ammann et al (2003), Zabolotnyuk et al (2010), and so on), we perform risky valuation based on credit information extracted from CDS spreads. Given the recovery rates and the CDS premia, we can compute the hazard rates via a standard calibration process (J.P. Morgan, 2001).…”

“…Therefore, some authors, such as Ammann et al (2003), Loncarski et al (2009), Zabolotnyuk et al (2010, have to make do with historical volatilities. Similarly, we calculate the historical volatility as the annualized standard deviation of the daily log returns over the last 2 years (from September 10, 2010 to September 10, 2012), and then value the convertible bond based on this real-world volatility.…”

“…However, most liquid stock options have relatively short maturates (rarely more than 8 years). As a result, some authors, such as Ammann et al (2003), Loncarski et al (2009), Zabolotnyuk et al (2010), have to make do with historical volatilities. Therefore, we segment the sample into two sets according to maturity: a short-maturity class (0 ~ 8 years) and a long-maturity class (> 8 years).…”

Is the Jump-Diffusion Model a Good Solution for Credit Risk Modeling? The Case of Convertible Bonds

“…Unlike other studies that use bond spreads for pricing (see Tsiveriotis and Fernandes (1998), Ammann, Kind and Wilde (2003), Zabolotnyuk, Jones, and Veld (2010), etc. ), we perform risky valuation based on credit information extracted from CDS spreads.…”