Bacha, Obiyathulla I. (2004): Pricing Hybrid Securities: The Case of Malaysian ICULS. Published in: The Journal of International Finance , Vol. 16, No. 3 (2004): pp. 3154-3172.
Download (183kB) | Preview
This paper provides an indepth analysis of Irredeemable Convertible Unsecured Loan Stocks or ICULS. A Malaysian variant of the convertible bond, ICULS are a hybrid security. Despite their introduction and trading since the late 1980’s, not much work have been done on them. This paper presents the first empirical evidence on the pricing of ICULS. We propose a pricing model for ICULS, built on the replication technique of options. Using 30 months (2½ years) of daily price data, we test our model on a sample of 34 ICULS. Though on average ICULS are underpriced by 2.3%, we find an equal number of under and overpriced ICULS. Our findings show that not only does the market misprice ICULS, the mispricing is sustained over quite a while. Infact, even over a one year window period, marginal mispricing remains. We argue that issuers of ICULS benefit much more than investors do.
|Item Type:||MPRA Paper|
|Original Title:||Pricing Hybrid Securities: The Case of Malaysian ICULS|
|Keywords:||Pricing of Hybrid Securities; Irredeemable Convertible Unsecured Loan Stocks or ICULS; Option Pricing, Pricing Efficiency|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G19 - Other
|Depositing User:||Obiyathulla/ I Bacha|
|Date Deposited:||15 Jan 2009 15:29|
|Last Modified:||18 Jan 2016 21:48|
Ammann, Manuel., Kind, Axel & Wilde, Christian (2003). Are convertible bonds underpriced? An analysis of the French market, Journal of Banking & Finance Vol 27, Issue 4, April, 635-653
Bancel, Franck., & Mittoo, Usha R (2003). Why European firms issue convertible debt. Working paper submitted for Conference on Forecasting Financial Markets, Paris, June 2003 Bardhan, I., Bergier, A., Derman, E., Dosemblet, C., Kani, I., Karasinki, P., (1993). Valuing convertible bonds as derivatives. Goldman Sachs Quantitative Strategies Research Notes, July
Brennan, M.J., & Schwartz, E.S., (1977). Convertible bonds: valuation and optimal strategies for call and conversion. Journal of Finance, Vol 32, No. 5, 1699 – 1715
Brennan, M.J., & Schwartz , E.S., (1988). The case for convertibles. Journal of Applied Corporate Finance, 1, 55-64
Chang, Shao-Chi, Chen, Sheng-Syan & Liu, Yichen (2003). Why firms use convertibles: a further test of the sequential-financing hypothesis. Journal of Banking & Finance
Das, Satyajit., (2001). Structured products and hybrid securities. John Wiley & Sons (Asia) Pte Ltd.
Greiner, Daniel, Kalay, Avner, & Kato, Hideaki Kiyoshi (2002). The market for callable-convertible bonds: evidence from Japan. Pacific-Basin Finance Journal, Vol 10, Issue 1, Jan, 1-27
Ingersoll, Jonathan E Jr (1977). A contingent-claims valuation of convertible securities. Journal of Financial Economics, Vol 4, Issue 3, May, 289-321
Isagawa, Nobuyuki (2000). Convertible debt: an effective financial instrument to control managerial opportunism. Review of Financial Economics, Vol 9, Issue 1, Spring, 15-26
Jensen, M. (1986). The agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76, 323-329
King, R., (1986). Convertible bond valuation: An empirical test. Journal of Financial Research 9 1, 53-69
Mayers , David (1998). Why firms issue convertible bonds: the matching of financial and real investment options. Journal of Financial Economics 478, 83-102
McConnell and Schwartz (1986), LYON Traming, Journal of Finance 41, 3, 561 576.
Obiyathulla Ismath Bacha (2001), Financial Derivatives Markets and Applications in Malaysia, Universiti Putra Malaysia Press
Stein, Jeremy C (1992). Convertible bonds as backdoor equity financing. Journal of Financial Economics Vol 32, Issue 1, August, 3-21
Tsiveriotis, K., & Fernandes, C.(1998). Valuing convertible bonds with credit risk. The Journal of Fixed Income 8, 3, 95-102
Yigitbasioglu, Ali Bora (2002 ). Pricing convertible bonds with interest rate, equity, credit, FX and volatility risk. Retrieved 6th November 2003 from website http://ideas.repec.org/p/wpa/wuwpfi/0201001.html