Reverse convertible bonds analyzed

M. Szymanowska, J.R. Ter Horst, C.H. Veld

Research output: Contribution to journalArticleScientificpeer-review

21 Citations (Scopus)

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%.
Original languageEnglish
Pages (from-to)895-919
JournalJournal of Futures Markets
Volume29
Issue number10
Publication statusPublished - 2009

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    Szymanowska, M., Ter Horst, J. R., & Veld, C. H. (2009). Reverse convertible bonds analyzed. Journal of Futures Markets, 29(10), 895-919.