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Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: Reverse convertible bonds analyzed
Author(s): Szymanowska, Marta
ter Horst, Jenke
Veld, Chris
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Keywords: reverse convertible bonds
reverse exchangeable securities
structured products
Stock warrants
Convertible bonds
Issue Date: Oct-2009
Date Deposited: 27-Oct-2009
Citation: Szymanowska M, ter Horst J & Veld C (2009) Reverse convertible bonds analyzed. Journal of Futures Markets, 29 (10), pp. 895-919.
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%.
DOI Link: 10.1002/fut.20397
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