An excellent approximation for the m out of n day provision

Liu, Qiang; Guo, Shuxin

doi:10.1016/j.najef.2020.101222

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2022

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“…To our knowledge, modeling call/conversion policies with a call‐notice period are studied in Grau et al (2003). Lau and Kwok (2004) examine the impact of the soft call provisions on CB pricing, and Liu and Guo (2020) propose an approximation to estimate the probability of triggering soft calls. Second, it is also difficult to model a non‐Markovian interest rate process like the LIBOR market model with the tree‐based model that can easily deal with the interactive American‐style call/conversion decisions.…”

Section: Discussionmentioning

confidence: 99%

A stochastic‐volatility equity‐price tree for pricing convertible bonds with endogenous firm values and default risks determined by the first‐passage default model

Dai

Fan

Liu

et al. 2022

Journal of Futures Markets

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This paper proposes a novel equity-price-tree-based convertible bond (CB) pricing model based on the first-passage default model under stochastic interest rates. By regarding equity values as down-and-out call options on firm values (FVs), at each tree node, we solve the implied FV and equity-price volatility (EPV), and then endogenously settle the default probability (DP) and also the dilution effect subject to CB conversions with the implied FV and capital structure. Our model captures the stylized negative (positive) relationships between the stochastically evolving DP and FV or EP (EPV) that cannot be fully achieved by existing CB pricing models.

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Section: Discussionmentioning

confidence: 99%