University of Sussex
Browse

File(s) not publicly available

Pricing and hedging convertible bonds: delayed calls and uncertain volatility

journal contribution
posted on 2023-06-08, 12:23 authored by Ali Bora Yigitbasioglu, Carol AlexanderCarol Alexander
Arbitrage-free price bounds for convertible bonds are obtained assuming equity-linked hazard rates, stochastic interest rates and different assumptions about default and recovery behavior. Uncertainty in volatility is modeled using a stochastic volatility process for the common stock that lies within a band but makes few other assumptions about volatility dynamics. A non-linear multi-factor reduced-form equity-linked default model leads to a set of non-linear partial differential complementarity equations that are governed by the volatility path. Empirical results focus on call notice period effects. Increasingly pessimistic values for the issuer’s substitution asset obtain as we introduce more uncertainty during the notice period. Uncertain in volatility, in particular, appears to be an important determinant of the call premium that is so often observed in issuer’s call policies.

History

Publication status

  • Published

Journal

International Journal of Theoretical and Applied Finance

ISSN

0219-0249

Publisher

World Scientific Publishing

Issue

3

Volume

9

Page range

415

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-09-11

Usage metrics

    University of Sussex (Publications)

    Categories

    No categories selected

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC