A stochastic‐volatility equity‐price tree for pricing convertible bonds with endogenous firm values and default risks determined by the first‐passage default model
This paper proposes a novel equity‐price‐tree‐based convertible bond (CB) pricing model based on the first‐passage default model under stochastic interest rates. By regarding equity values as down‐and‐out call options on firm values (FVs), at each tree node, we solve the implied FV and equity‐price...
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| Veröffentlicht in: | The journal of futures markets 2022-12, Vol.42 (12), p.2103-2134 |
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| container_end_page | 2134 |
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| container_issue | 12 |
| container_start_page | 2103 |
| container_title | The journal of futures markets |
| container_volume | 42 |
| creator | Dai, Tian‐Shyr Fan, Chen‐Chiang Liu, Liang‐Chih Wang, Chuan‐Ju Wang, Jr‐Yan |
| description | This paper proposes a novel equity‐price‐tree‐based convertible bond (CB) pricing model based on the first‐passage default model under stochastic interest rates. By regarding equity values as down‐and‐out call options on firm values (FVs), at each tree node, we solve the implied FV and equity‐price volatility (EPV), and then endogenously settle the default probability (DP) and also the dilution effect subject to CB conversions with the implied FV and capital structure. Our model captures the stylized negative (positive) relationships between the stochastically evolving DP and FV or EP (EPV) that cannot be fully achieved by existing CB pricing models. |
| doi_str_mv | 10.1002/fut.22370 |
| format | Article |
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| ispartof | The journal of futures markets, 2022-12, Vol.42 (12), p.2103-2134 |
| issn | 0270-7314 1096-9934 |
| language | eng |
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| source | EBSCOhost Business Source Complete; Access via Wiley Online Library |
| subjects | Capital structure convertible bond Dilution effect Endogenous first‐passage default model Interest rates stochastic interest rate stochastic volatility Values |
| title | A stochastic‐volatility equity‐price tree for pricing convertible bonds with endogenous firm values and default risks determined by the first‐passage default model |
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