RT Journal Article
SR Electronic
T1 Convertible Bond Prices and Inherent Biases
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 64
OP 73
DO 10.3905/jfi.2003.319361
VO 13
IS 3
A1 Peter Carayannopoulos
A1 Madhu Kalimipalli
YR 2003
UL https://pm-research.com/content/13/3/64.abstract
AB This examination of the pricing performance of a reduced-form convertible bond valuation model uses a recent sample of monthly U.S. convertible bond prices observed over January 2001–September 2002. Recent U.S. data help us understand the particular market. The model produces prices that are consistently lower than observed market prices when the embedded conversion option is in the money and higher than observed market prices when the conversion option is out of the money. Evidence from the sample suggests that the deep out-of-the-money bias is not related to the theoretical model's performance but rather the result of the fact that convertible bonds with low conversion value seem to be generally underpriced so much that their prices often imply negative embedded option values.