An Empirical Comparison of Convertible Bond Valuation Models

Citation

Zabolotnyuk Y, Jones R & Veld C (2010) An Empirical Comparison of Convertible Bond Valuation Models. Financial Management, 39 (2), pp. 675-706. https://doi.org/10.1111/j.1755-053X.2010.01088.x

Abstract
This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation is 1.86% for the Ayache-Forsyth-Vetzal (2003) model, 1.94% for the Tsiveriotis-Fernandes (1998) model, and 3.73% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal (2003) and Tsiveriotis-Fernandes (1998) models outperform the Brennan-Schwartz (1980) model.

Keywords
convertible bonds; Tsiveriotis-Fernandes model; Ayache-Forsyth-Vetzal model; Brennan-Schwartz model; convertible bond valuation models; Marquardt algorithm; Convertible bonds Mathematical models

Journal
Financial Management: Volume 39, Issue 2