On the Valuation of Convertible Bonds with respect to Skewness, Kurtosis and Credit Risk
Date Issued
2007
Date
2007
Author(s)
Yu, kuan-Ting
DOI
en-US
Abstract
Convertible bond is an important financial instrument used as the funding or investment tool in practice. Over the past few decades, there are numerous valuation models proposed, however, the one with direct consideration about skewness and kurtosis of underlying stock return is lacking. This research intends to examine the effects of these parameters on the convertible bond value. For credit risk modeling, we consider that default event of convertibles issuer may occur after the successive rating downgrades, which coincides with the reality.
The general finding indicates that positive skewness contributes positive influence and negative skewness contributes negative influence on the value of convertible bond with five years maturity. Since convertibles are usually with longer maturity, this result is in the different pattern with that of relative short term call options. The effect of kurtosis is slightly small. In addition, maturity and volatility will alter the pattern skewness and kurtosis influence convertible bond value. On the other hand, the initial credit rating also have the effects on the value of convertible bond, particularly, on the value of provisions such as put provision, call provision, and reset provision.
To examine the efficiency of initial offering pricing of convertibles issues, we conduct the empirical investigation in the period from 2001 to 2006 in Taiwan CB market. Based on the results, there is an evidence that initially offering prices of convertibles tends to be undervalued by issuers. Such inefficiency will be eliminated as long as liquidity of convertibles trading is large.
Subjects
信用等級
隱含選擇權
馬可夫鏈模型
非常態性
路徑相依
Credit rating
Embedded options
Markov chain model
Non-normality
Path dependent
Type
thesis
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