Individual Investors and Suboptimal Early Exercises in the Fixed-Income Market

Posted: 10 Sep 2014  

Mathias Eickholt

University of Passau

Oliver Entrop

University of Passau

Marco Wilkens

University of Augsburg

Date Written: April 2, 2014

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.

Keywords: decision strategy, decision costs, transaction costs, putable bond

JEL Classification: G10, G12, G13

Suggested Citation

Eickholt, Mathias and Entrop, Oliver and Wilkens, Marco, Individual Investors and Suboptimal Early Exercises in the Fixed-Income Market (April 2, 2014). Available at SSRN: https://ssrn.com/abstract=2493898 or http://dx.doi.org/10.2139/ssrn.2493898

Mathias Eickholt

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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