A Simulation-Based Pricing Method for Convertible Bonds

58 Pages Posted: 7 Nov 2008

See all articles by Axel H. Kind

Axel H. Kind

University of Konstanz

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: March 2003

Abstract

We propose a pricing model for convertible bonds based on Monte Carlo simulation that is more flexible than previous lattice-based methods because it allows to better capture the dynamics of the underlying state variables. Furthermore, the model is able to deal with embedded American-style put and call features with path-dependent trigger conditions. The simulation method uses parametric representations of the early exercise decisions and consists of two stages. In the first stage, the parameters representing the exercise strategies are optimized on a set of simulated stock prices. Subsequently, the optimized parameters are applied to a new simulation set to determine the model price. In an empirical analysis, the model is found to provide a better fit compared to previous studies.

Suggested Citation

Kind, Axel H. and Wilde, Christian, A Simulation-Based Pricing Method for Convertible Bonds (March 2003). NYU Working Paper No. S-DRP-03-07. Available at SSRN: https://ssrn.com/abstract=1296372

Axel H. Kind

University of Konstanz

Universitätsstraße 10
Konstanz, D-78457
Germany

Christian Wilde

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

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