Analyzing pricing of convertible bonds with stochastic interest rate modelling
Jiang Liang;Lin Hongxi;Lin Jianwei;Song Liping;School of Mathematics and Finance, Putian University;School of Business, Putian University;
This paper develops a parametric estimation for the time-varying mean stochastic interest model by using regularization method. Furthermore, the price of convertible bond could be computed by using the D'Yakonov splitting method together with stable finite difference scheme. The numerical results show that the prices of convertible bonds are not significantly different when using the stochastic interest rate model and the extended model. However, the prices of convertible bonds are highly sensitive to the term structure of Gaussian and Non-Gaussian interest rate model, including the extended model. These results imply that it is important to consider the effects of different term structure models in valuing convertible bonds, but not necessary to consider the mean function.