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Reverse convertible bonds analyzed
Author(s) -
Szymanowska Marta,
Horst Jenke Ter,
Veld Chris
Publication year - 2009
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20397
Subject(s) - convertible bond , coupon , issuer , bond , callable bond , business , financial economics , economics , payment , monetary economics , cash , finance
We study the pricing of reverse convertible (RC) bonds. These are bonds that carry high coupon payments. In exchange, the issuer has an option at the maturity date to either redeem the bonds in cash or to deliver a pre‐specified number of shares. We find that Dutch plain vanilla and knock‐in RC bonds are, on average, overpriced by almost 6%. This overpricing is confirmed in a model‐free analysis with respect to option‐ and bond‐pricing models. We find that rational factors explain 23% of the documented overpricing. In addition, we find that the combination of financial marketing, framing, and the representativeness bias further increases our ability to explain the documented overpricing to more than 35%. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:895–919, 2009