Reverse convertible bonds analyzed
Article first published online: 27 JUL 2009
© 2009 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 29, Issue 10, pages 895–919, October 2009
How to Cite
Szymanowska, M., Horst, J. T. and Veld, C. (2009), Reverse convertible bonds analyzed. J. Fut. Mark., 29: 895–919. doi: 10.1002/fut.20397
- Issue published online: 3 AUG 2009
- Article first published online: 27 JUL 2009
- Manuscript Accepted: DEC 2008
- Manuscript Received: JUN 2007
- Simon Fraser University (President's Research Grant).
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%. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:895–919, 2009