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Pricing and hedging convertible bonds: delayed calls and uncertain volatility
journal contribution
posted on 2023-06-08, 12:23 authored by Ali Bora Yigitbasioglu, Carol AlexanderCarol AlexanderArbitrage-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.
History
Publication status
- Published
Journal
International Journal of Theoretical and Applied FinanceISSN
0219-0249Publisher
World Scientific PublishingExternal DOI
Issue
3Volume
9Page range
415Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2012-09-11Usage metrics
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