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Simulation-Based Pricing of Convertible Bonds

42 Pages Posted: 1 Aug 2005  

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: 2007

Abstract

We propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.

Keywords: Convertible bonds, pricing, american options, Monte Carlo simulation

JEL Classification: G13, G14

Suggested Citation

Ammann, Manuel and Kind, Axel H. and Wilde, Christian, Simulation-Based Pricing of Convertible Bonds (2007). Journal of Empirical Finance, 2007. Available at SSRN: https://ssrn.com/abstract=762804 or http://dx.doi.org/10.2139/ssrn.762804

Manuel Ammann

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

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Axel H. Kind (Contact Author)

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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