A New Nonparametric Approach to Price Convertible Bond Based on Random Interest Rate

Xisheng Yu

Abstract


This paper proposes an idea of combining the following two nonparametric approaches for two-factor convertible bond valuation. One is the stimulation of random rate, the interest rate term structure based on polynomial spine function was attained by only using historical data; Another is Canonical risk-neutral probability, which was attained by observed stock returns, so that the convertible bonds can be valuated by using equivalent martingale measure.


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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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