On the Valuation of Convertible Bonds with respect to Skewness, Kurtosis and Credit Risk

• Main Authors: kuan-Ting Yu, 余冠廷
• Other Authors: Tsun-Siou Lee
• Format: Others
• Language: en_US
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/81244043414291329104

碩士 === 國立臺灣大學 === 財務金融學研究所 === 95 === Convertible bond is an important financial instrument used as the funding or investment tool in practice. Over the past few decades, there are numerous valuation models proposed, however, the one with direct consideration about skewness and kurtosis of underlying stock return is lacking. This research intends to examine the effects of these parameters on the convertible bond value. For credit risk modeling, we consider that default event of convertibles issuer may occur after the successive rating downgrades, which coincides with the reality. The general finding indicates that positive skewness contributes positive influence and negative skewness contributes negative influence on the value of convertible bond with five years maturity. Since convertibles are usually with longer maturity, this result is in the different pattern with that of relative short term call options. The effect of kurtosis is slightly small. In addition, maturity and volatility will alter the pattern skewness and kurtosis influence convertible bond value. On the other hand, the initial credit rating also have the effects on the value of convertible bond, particularly, on the value of provisions such as put provision, call provision, and reset provision. To examine the efficiency of initial offering pricing of convertibles issues, we conduct the empirical investigation in the period from 2001 to 2006 in Taiwan CB market. Based on the results, there is an evidence that initially offering prices of convertibles tends to be undervalued by issuers. Such inefficiency will be eliminated as long as liquidity of convertibles trading is large.