Simulation-based pricing of convertible bonds
2008, Ammann, Manuel, Kind, Axel, Wilde, Christian
We propose and empirically investigate a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.
What is going on in the oil market?
2004, Brevik, Frode, Kind, Axel
In this article, we propose a consistent view on the recent oil-price history based on fundamental data and economic theory. We sum up: After the turn of the century three major stylized shocks have hit market. First, the demand curve has shifted fight outwards, mainly driven, as extensively reported in the media, by sustained growth in China and other Asian Countries. Second, supply disruptions in countries with low extraction costs (Iraq and Venezuela) have shifted the supply curve to the left. Third, we show that speculators adjust their inventories in order to take advantage of predictable price fluctuations and play themselves a major role in the price formation. Optimal storage theory implies that aggregate inventories are negatively related to the oil price and positively to the volatility of supply and demand shocks.
International stock-bond correlations in a simple affine asset pricing model
2006, d’Addona, Stefano, Kind, Axel
We use an affine asset pricing model to jointly value stocks and bonds. This enables us to derive endogenous correlations and to explain how economic fundamentals influence the correlation between stock and bond returns. The presented model is implemented for G7 post-war economies and its in-sample and out-of-sample performance is assessed by comparing the correlations generated by the model with conventional statistical measures. The affine framework developed in this paper is found to generate stock–bond correlations that are in line with empirically observed figures.
Are convertible bonds underpriced? : an analysis of the French market
2003, Ammann, Manuel, Kind, Axel, Wilde, Christian
We investigate the pricing of convertible bonds on the French convertible bond market using daily market prices for a period of 18 months. Instead of a firm-value model as used in previous studies, we use a stock-based binomial-tree model with exogenous credit risk that accounts for all important convertible bond specifications and is therefore well suited for pricing convertible bonds. The empirical analysis shows that the theoretical values for the analyzed convertible bonds are on average more than 3% higher than the observed market prices. This result applies to both the standard convertibles and the exchangeable bonds in our sample. The difference between market and model prices is greater for out-of-the-money convertibles than for at- or in-the-money convertibles. A partition of the sample according to maturity indicates that there is a positive relationship between underpricing and maturity with decreasing mispricing for bonds with shorter time to maturity.