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An Empirical Comparison of Convertible Bond Valuation Models
Author(s) -
Zabolotnyuk Yuriy,
Jones Robert,
Veld Chris
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01088.x
Subject(s) - convertible bond , convertible arbitrage , valuation (finance) , econometrics , convertible , bond valuation , bond , economics , actuarial science , mathematics , financial economics , finance , engineering , capital asset pricing model , arbitrage pricing theory , risk arbitrage , structural engineering
This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt 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 model, 1.94% for the Tsiveriotis‐Fernandes model, and 3.73% for the Brennan‐Schwartz model. For this and other measures of fit, the Ayache‐Forsyth‐Vetzal and Tsiveriotis‐Fernandes models outperform the Brennan‐Schwartz model.