An Empirical Comparison of Convertible Bond Valuation Models |
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| Authors: | Yuriy Zabolotnyuk Robert Jones Chris Veld |
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| Affiliation: | 1. Yuriy Zabolotnyuk is an Assistant Professor at the Sprott School of Business, Carleton University in Ottawa, Ontario, Canada.;2. Robert Jones is a Professor of Economics at Simon Fraser University in Burnaby, British Columbia, Canada.;3. Chris Veld is a Professor of Finance at the University of Stirling, United Kingdom. |
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| Abstract: | ![]()
This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation is 1.86% for the Ayache-Forsyth-Vetzal model, 1.94% for the Tsiveriotis-Fernandes model, and 3.73% for the Brennan-Schwartz model. For this and other measures of fit, the Ayache-Forsyth-Vetzal and Tsiveriotis-Fernandes models outperform the Brennan-Schwartz model. |
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