An Empirical Comparison of Convertible Bond Valuation Models

This paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation is 1.86% for the Ayache-Forsyth-Vetzal (2003) model, 1.94% for the Tsiveriotis-Fernandes (1998) model, and 3.73% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal (2003) and Tsiveriotis-Fernandes (1998) models outperform the Brennan-Schwartz (1980) model