Convertible bond underpricing in the french market
: an empirical study

  • Josefine Durr (Student)

Student thesis: Master's Thesis

Abstract

The pricing of convertible bonds is a fairly unstudied field of asset pricing due to the instruments’ complex nature and its niche character. The aim of this dissertation is to compute model implied prices for convertible bonds and compare it to their market value in order to determine whether the market truly underprices convertible bonds, a financial theory that has been discussed broadly in the academic community. As a pricing model I applied a Monte Carlo simulation for stock prices and determined the optimal exercise strategy through the Least-Squares method. With this methodology I priced 34 convertible bonds in the French market and obtained an average underpricing of 4.17%, which reduces to 2.72% when excluding outliers. The results align with previous conducted studies of the French market but are in contrast with some other empirical results in the United States, but due to the substantial difference in convertible bond markets worldwide a direct comparison is not appropriate. Although the finding supports the general claim of convertible bond underpricing and encourages investors to engage in hedging strategies, the lack of substantial research in the European market calls for further empirical studies and improvements of the work presented.
Date of Award21 Oct 2022
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorFlorian Nagler (Supervisor)

Keywords

  • Convertible bonds
  • Pricing
  • French market
  • Simulation
  • Least-squares method

Designation

  • Mestrado em Finanças

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