Valuation of Euro-Convertible Bonds in a Markov-Modulated, Cox–Ingersoll–Ross Economy
This study investigates the valuation of Euro-convertible bonds (ECBs) using a novel Markov-modulated cojump-diffusion (MMCJD) model, which effectively captures the dynamics of stochastic volatility and simultaneous jumps (cojumps) in both the underlying stock prices and foreign exchange (FX) rates....
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2025-06-01
|
| Series: | Mathematics |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7390/13/13/2075 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Summary: | This study investigates the valuation of Euro-convertible bonds (ECBs) using a novel Markov-modulated cojump-diffusion (MMCJD) model, which effectively captures the dynamics of stochastic volatility and simultaneous jumps (cojumps) in both the underlying stock prices and foreign exchange (FX) rates. Furthermore, we introduce a Markov-modulated Cox–Ingersoll–Ross (MMCIR) framework to accurately model domestic and foreign instantaneous interest rates within a regime-switching environment. To manage computational complexity, the least-squares Monte Carlo (LSMC) approach is employed for estimating ECB values. Numerical analyses demonstrate that explicitly incorporating stochastic volatilities and cojumps significantly enhances the realism of ECB pricing, underscoring the novelty and contribution of our integrated modeling approach. |
|---|---|
| ISSN: | 2227-7390 |