Pricing and hedging convertible bonds: delayed calls and uncertain volatility

Yigitbasioglu, Ali Bora and Alexander, Carol (2006) Pricing and hedging convertible bonds: delayed calls and uncertain volatility. International Journal of Theoretical and Applied Finance, 9 (3). p. 415. ISSN 0219-0249

Full text not available from this repository.

Abstract

Arbitrage-free price bounds for convertible bonds are obtained assuming equity-linked hazard rates, stochastic interest rates and different assumptions about default and recovery behavior. Uncertainty in volatility is modeled using a stochastic volatility process for the common stock that lies within a band but makes few other assumptions about volatility dynamics. A non-linear multi-factor reduced-form equity-linked default model leads to a set of non-linear partial differential complementarity equations that are governed by the volatility path. Empirical results focus on call notice period effects. Increasingly pessimistic values for the issuer’s substitution asset obtain as we introduce more uncertainty during the notice period. Uncertain in volatility, in particular, appears to be an important determinant of the call premium that is so often observed in issuer’s call policies.

Item Type: Article
Keywords: Call notice period; call premium; convertible bond; delayed calls; equity-linked default; stochastic interest rates; volatility uncertainty
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
Related URLs:
Depositing User: Carol Alexander
Date Deposited: 11 Sep 2012 15:48
Last Modified: 11 Sep 2012 15:48
URI: http://sro.sussex.ac.uk/id/eprint/40632
📧 Request an update