An Empirical Comparison of Convertible Bond Valuation Models

54 Pages Posted: 25 Jun 2007 Last revised: 18 Oct 2009

See all articles by Yuriy Zabolotnyuk

Yuriy Zabolotnyuk

Carleton University

Robert A. Jones

Simon Fraser University (SFU) - Department of Economics

Chris Veld

Monash University

Date Written: October 15, 2009

Abstract

This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation is 1.86% for the Ayache-Forsyth-Vetzal (2003) model, 1.94% for the Tsiveriotis-Fernandes (1998) model, and 3.73% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal (2003) and Tsiveriotis-Fernandes (1998) models outperform the Brennan-Schwartz (1980) model.

Keywords: convertible bonds, credit risk, Ayache-Forsyth-Vetzal model, Brennan-Schwartz model, Tsiveriotis-Fernandes model

JEL Classification: C12, C63, G13

Suggested Citation

Zabolotnyuk, Yuriy and Jones, Robert A. and Veld, Chris, An Empirical Comparison of Convertible Bond Valuation Models (October 15, 2009). Available at SSRN: https://ssrn.com/abstract=994805 or http://dx.doi.org/10.2139/ssrn.994805

Yuriy Zabolotnyuk (Contact Author)

Carleton University ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S5B6
Canada

Robert A. Jones

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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