Are Convertible Bonds Underpriced?: An Analysis of the French Market

St. Gallen Economics Discussion Paper No. 2001-02

Journal of Banking and Finance, 2003

28 Pages Posted: 17 May 2001  

Manuel Ammann

University of St. Gallen - School of Finance

Axel H. Kind

University of Basel

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: September 2001

Abstract

We investigate the pricing performance of three convertible bond pricing models on the French convertible bond market using daily market prices. We examine a component model separating the convertible bond into a bond and option component, a method based on the Margrabe model for pricing exchange options, and a binomial-tree model with exogenous credit risk. All three models are found to deliver theoretical values for the analyzed convertible bonds that tend to be higher than the observed market prices. The prices obtained by the binomial-tree model are nearest to market prices and the mispricing is no longer statistically significant for the majority of bonds in our sample. For all models, the difference between market and model prices is greater for out-of-the money convertibles than for at- or in-the-money convertibles.



Keywords: Convertible bonds, pricing, French market, binomial tree, derivatives

JEL Classification: G13, G15

Suggested Citation

Ammann, Manuel and Kind, Axel H. and Wilde, Christian, Are Convertible Bonds Underpriced?: An Analysis of the French Market (September 2001). St. Gallen Economics Discussion Paper No. 2001-02; Journal of Banking and Finance, 2003. Available at SSRN: https://ssrn.com/abstract=268470 or http://dx.doi.org/10.2139/ssrn.268470

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Axel H. Kind

University of Basel ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

HOME PAGE: http://wwz.unibas.ch/personen/profil/person/kind/abteilung/cofi/

Christian Wilde

Goethe University Frankfurt - Department of Finance ( email )

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

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