Reverse Convertible Bonds Analyzed
Paper by Marta Szymanowska, Jenke Ter Horst and Chris Veld
We study the pricing of reverse convertible 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%.
June 25th, 2009 at 10:22 pm
Clearly they dont understand the effect of commissions to the dealers or the differences in funding levels between counterparties…..
September 7th, 2009 at 12:43 pm
I could not agree more with Mika and what on earth is “model free analysis” ?
Ridiculous…