An Empirical Comparison of Convertible Bond Valuation Models


  • The authors thank Christina Atanasova, Alex Paseka, Christophe Perignon, Amir Rubin, Yulia Veld-Merkoulova, seminar participants at Simon Fraser University and the University of Stirling, and participants at the Financial Management Conference in Orlando (October 2007), the Scottish BAA in Glasgow (September 2008), and the Northern Finance Association in Calgary (September 2008) for helpful comments and suggestions. Special thanks go to an anonymous referee and to the editor (Bill Christie) for their very useful comments. In addition, Chris Veld gratefully recognizes the financial support of the Social Sciences and Humanities Research Council of Canada. The usual disclaimer applies.


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.