Reverse Convertible Bonds Analyzed

Journal of Futures Markets, Vol. 29, No. 10, pp. 895-919, 2009

31 Pages Posted: 7 Sep 2006 Last revised: 28 Mar 2012

See all articles by Marta Szymanowska

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)

Jenke ter Horst

TIAS School for Business and Society

Chris Veld

Monash University

Date Written: December 19, 2008

Abstract

We study the pricing of reverse convertible bonds. These are bonds that carry high coupon payments. In exchange, the issuer has an option at the maturity date to either redeem the bonds in cash, or to deliver a pre-specified number of shares. We find that Dutch plain vanilla and knock-in reverse convertible bonds are, on average, overpriced by almost 6%. This overpricing is confirmed in a model-free analysis with respect to option and bond pricing models. We find that rational factors explain 23% of the documented overpricing. In addition, we find that the combination of financial marketing, framing, and the representativeness bias further increases our ability to explain the documented overpricing to more than 35%.

Keywords: reverse convertible bonds, reverse exchangeable securities, structured products

JEL Classification: G10, G19

Suggested Citation

Szymanowska, Marta and ter Horst, Jenke R. and Veld, Chris, Reverse Convertible Bonds Analyzed (December 19, 2008). Journal of Futures Markets, Vol. 29, No. 10, pp. 895-919, 2009. Available at SSRN: https://ssrn.com/abstract=730543

Marta Szymanowska (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Finance ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31104089607 (Phone)

HOME PAGE: http://www.rsm.nl/mszymanowska

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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