Reverse convertible bonds analyzed
The Journal of Futures Markets , Volume 29 - Issue 10 p. 895- 919
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 RC 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%.
|ERIM Article Series (EAS)|
|The Journal of Futures Markets|
|Organisation||Erasmus Research Institute of Management|
Reverse convertible bonds analyzed. (2009). Reverse convertible bonds analyzed. The Journal of Futures Markets, 29(10), 895–919. doi:10.1002/fut.20397