Reverse convertible bonds analyzed

Citation

Szymanowska M, ter Horst J & Veld C (2009) Reverse convertible bonds analyzed. Journal of Futures Markets, 29 (10), pp. 895-919. https://doi.org/10.1002/fut.20397

Abstract
We study the pricing of reverse convertible (RC) bonds. These are bonds that carry high coupon payments. In exchange, the issuer has an option at the maturity date to either redeem the bonds in cash, or to deliver a pre-specified number of shares. We find that Dutch plain vanilla and knock-in reverse convertible bonds are, on average, overpriced by almost 6%. This overpricing is confirmed in a model-free analysis with respect to option- and bond- pricing models. We find that rational factors explain 23% of the documented overpricing. In addition, we find that the combination of financial marketing, framing, and the representativeness bias further increases our ability to explain the documented overpricing to more than 35%.

Keywords
reverse convertible bonds; reverse exchangeable securities; structured products; Stock warrants; Convertible bonds

Journal
Journal of Futures Markets: Volume 29, Issue 10