English, Article edition: PRICING AND HEDGING CONVERTIBLE BONDS: DELAYED CALLS AND UNCERTAIN VOLATILITY ALI BORA YIǦITBAÅIOǦLU; CAROL ALEXANDER

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Bookmark: http://trove.nla.gov.au/version/82809
Physical Description
  • article
Language
  • English

Edition details

Title
  • PRICING AND HEDGING CONVERTIBLE BONDS: DELAYED CALLS AND UNCERTAIN VOLATILITY
Author
  • ALI BORA YIǦITBAÅIOǦLU
  • CAROL ALEXANDER
Physical Description
  • article
Notes
  • 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.
  • Call notice period, call premium, convertible bond, delayed calls, equity-linked default, stochastic interest rates, volatility uncertainty
  • RePEc:wsi:ijtafx:v:09:y:2006:i:03:p:415-453
Language
  • English
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