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Utility indifference pricing of convertible bonds

Author

Listed:
  • Jian Liu

    (School of Economics and Management, Changsha University of Science and Technology, Changsha 410004, P. R. China)

  • Mengxian Tao

    (School of Economics and Management, Changsha University of Science and Technology, Changsha 410004, P. R. China)

  • Chaoqun Ma

    (Business School, Hunan University, Changsha 410082, P. R. China)

  • Fenghua Wen

    (Business School, Central South University, Changsha 410083, P. R. China;
    Department of Industrial and Systems Engineering, University of Florida, Gainesville 32611-6595, USA)

Abstract

We propose a pricing model for convertible bonds based on the utility-indifference method and get access to the empirical results by use of Information Technology. By using the stochastic control theory, the general expression of utility indifference price on convertible bonds is obtained under the CIR interest rate model. Furthermore, using the proposed theoretical model, we present an empirical pricing study of China's market, using three convertible bonds and more than 70 months of daily market prices. The parameters value is estimated by the maximum likelihood method, and the prices of convertible bonds are simulated by the Monte Carlo approach. The empirical results indicate that the theoretical prices are higher than the actual market prices 0.24–4.58%, and the utility indifference prices are better than the Black–Scholes (BS) prices.

Suggested Citation

  • Jian Liu & Mengxian Tao & Chaoqun Ma & Fenghua Wen, 2014. "Utility indifference pricing of convertible bonds," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 429-444.
    • Handle: RePEc:wsi:ijitdm:v:13:y:2014:i:02:n:s0219622014500527
    DOI: 10.1142/S0219622014500527
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    Cited by:

    1. Dai, Zhifeng & Chen, Xiaohong & Wen, Fenghua, 2015. "A modified Perry’s conjugate gradient method-based derivative-free method for solving large-scale nonlinear monotone equations," Applied Mathematics and Computation, Elsevier, vol. 270(C), pages 378-386.
    2. Yi Hu & Dongmei Guo & Mingxi Wang & Xi Zhang & Shouyang Wang, 2015. "The Relationship between Energy Consumption and Economic Growth: Evidence from China’s Industrial Sectors," Energies, MDPI, vol. 8(9), pages 1-15, August.

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