Reverse convertibles and discount certificates in the case of constant and stochastic volatilities

Wilkens, Sascha; Röder, Klaus

doi:10.1007/s11408-003-0104-7

Cited by 8 publications

(2 citation statements)

References 30 publications

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“…Because Lèvy jump is a better representation of the real world stock return movements, in this paper, we incorporate this process to evaluate RCNs — which some researchers have tried to evaluate in the past. For example, Wilkens and Röder (2003) used European‐style put options to valuate the equity component of RCNs by assuming the underlying stock follows GBM and its volatilities are stochastic. They found that the RCNs were underpriced.…”

Section: Literature Reviewmentioning

confidence: 99%

Time‐changed Lévy jump processes with GARCH model on reverse convertibles

Simi

Wang

2013

Rev Financ Econ

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a b s t r a c tFor decades, financial institutions have been very motivated in creating structured high-yield financial products, especially in the economic environment of lower interest rates. Reverse convertible notes (RCNs) are the type of financial instruments, which in recent years first in Europe and then in the UShave become highly desirable financial structured products. They are complex financial structured products because they are neither plain bonds nor stocks. Instead, they are structured products embedding equity options, which involve a significant amount of asset returns' uncertainty. Given this fact, pricing of reverse convertible notes becomes a really big challenge, where both the general Black-Scholes option pricing model and the compound Poisson jump model which are designed to catch large crashes, are not suitable in valuing these kinds of products. In this paper, we propose a new asset-pricing framework for reverse convertible notes by extending the pure Brownian increments to Lévy jump risks for the underlying stock return movements. Our framework deals with time-changing volatilities of stock options with Lévy jump processes by considering the stocks' infinite-jump possibilities. We then use a discrete-time GARCH with time-changed dynamics Lévy Jump processes in order to derive the assets' valuations. The results from our new model are close to the market's valuations, especially with the normal-inverse-Gaussian model of the Lévy jump family.

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Section: Literature Reviewmentioning

confidence: 99%

Time‐changed Lévy jump processes with GARCH model on reverse convertibles

Simi

Wang

2013

Rev Financ Econ

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“…This is plausible, because window dressing increases the probability that the venture capitalist will exercise the conversion option to become the owner of a substantial fraction of the equity of the project. Convertible securities have been recognized by several previous studies as an important instrument to mitigate investment risks (Wilkens and Röder 2003). Using the most common convertible security, convertible debt, VC and PE funds enjoy both the risk protection of being priority lenders and the option to convert debt into equity in order to participate almost as profitably as traditional equity investors in successful investments.…”

Section: Convertible Securitiesmentioning

confidence: 99%

Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments

Lauterbach

Welpe

Fertig

2007

Fin Mkts Portfolio Mgmt

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Recent research has pointed out the need to differentiate between good versus poor performance of venture capital and private equity investments and to analyze the factors that determine the ‘winners’ and ‘losers’ of a fund. This study examines the different contractual and behavioral characteristics and their influence on the positive and negative performances of private equity investments. Specifically, we analyze how fund managers apply tools and investment behavior to mitigate risks and maximize returns. The empirical investigation of these questions is based on a merged dataset, which combines the Venture Economics and CEPRES databases. It includes a total of 1,011 investments made by 137 different funds that belong to 54 private equity and venture capital firms worldwide over the period from 1979 to 2003. Our results confirm that the reduction of losses and the maximization of investment profits have different antecedents. Although losses are minimized by the use of convertibles and by increasing the venture capital firms’ accumulated experience, profits are increased by the potential of the fund’s management to allocate resources to portfolio companies. Our findings contribute to the understanding of the determinants of venture capital and private equity returns by differentiating between the mitigation of risks and the maximization of profits. Copyright Swiss Society for Financial Market Research 2007Private equity, Venture capital, Staging, Risk, Return, Performance, Profit, Losses, G24, E51,

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Convertible Bonds

2012

Structured Finance

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Reverse convertibles and discount certificates in the case of constant and stochastic volatilities

Cited by 8 publications

References 30 publications

Time‐changed Lévy jump processes with GARCH model on reverse convertibles

Time‐changed Lévy jump processes with GARCH model on reverse convertibles

Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments

Convertible Bonds

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