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Pricing securities with multiple risks: A case of exchangeable debt

Author

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  • Mateti, Ravi S.
  • Hegde, Shantaram P.
  • Puri, Tribhuvan

Abstract

Building on the work of Das and Sundaram (2007), we develop a widely applicable model to price securities subject to interest rate, equity, and default risks and use it to price exchangeable bonds. The extension features a trivariate recombining lattice instead of the original model’s bivariate recombining lattice. We also show how to estimate some critical non-observable inputs to implement the model by using current market data so that the model’s prices reflect current market information. We test the model on a sample of exchangeable bonds to determine the model’s empirical performance. Besides exchangeable bonds, we can also use the model to price securities such as reverse exchangeable bonds, bonds exchangeable to indexes, and bonds exchangeable to commodities.

Suggested Citation

  • Mateti, Ravi S. & Hegde, Shantaram P. & Puri, Tribhuvan, 2013. "Pricing securities with multiple risks: A case of exchangeable debt," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1018-1028.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:1018-1028
    DOI: 10.1016/j.jbankfin.2012.11.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchangeable bonds; Trivariate recombining lattice; Risk-neutral setting;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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