An Empirical Comparison of Convertible Bond Valuation Models
54 Pages Posted: 25 Jun 2007 Last revised: 18 Oct 2009
Date Written: October 15, 2009
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: Suggested Citation