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

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.