St. Gallen Economics Discussion Paper No. 2001-02
28 Pages Posted: 17 May 2001
Date Written: September 2001
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: 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