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Abstract:
This 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) model, 1.94% for the Tsiveriotis-Fernandes (1998) model, and 3.73% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal (2003) and Tsiveriotis-Fernandes (1998) models outperform the Brennan-Schwartz (1980) model.

convertible bonds, credit risk, Ayache-Forsyth-Vetzal model, Brennan-Schwartz model, Tsiveriotis-Fernandes model

Abstract:
Put-call parity is used to study the early exercise premium for currency options traded on the Philadelphia Stock Exchange. Using 564 pairs of call and put options evidence is provided that the early exercise premia is on average 5.71% for put options and 6.88% for call options. The premiums for both call and put options are strongly related to time to maturity and the interest rate differential. These results are important when using a European option pricing model for the valuation of American options.

Put-call parity, currency options, early exercise premium, Black-Scholes option pricing model

Abstract:
This paper examines the market memory effect in convertible bond markets. More specifically, we look at the pricing of convertible bonds issued after the original issuer redeemed previous issues without giving an opportunity for investors to benefit from bond value appreciation. We find evidence that the market underprices new convertible bond issues of firms that call their bonds early. We also find that the equity-like bonds of early calling firms are more underpriced than debt-like bonds of the same firms.

convertible bonds, optimal call policy, market memory