A Tree Model for Pricing Convertible Bonds with Equity, Market and Default Risk
This article presents a trinomial tree model for pricing zero-coupon convertible bonds (CBs) subject to equity, market and default risk. Interest rates are assumed to follow a mean-reverting square root process. Equity prices prior to default are modeled as a constant elasticity of variance (CEV) process, which is capable of reproducing the volatility smile observed in the empirical data. Based on the empirical results in 1, the default intensity is specified as a function of the stock price and interest rate. Embedded call and put options as well as the correlation between interest rates and equity prices are also considered. A numerical example shows the use of the model and numerical results explain the impact of different parameters on the prices of CBs.
CEV process convertible bond default intensity tree model
Ruxing Xu Shenghong Li
Department of Mathematics, Zhejiang University, Hangzhou 310017, China
国际会议
北京
英文
673-677
2009-07-24（万方平台首次上网日期，不代表论文的发表时间）