Are Convertible Bonds Underpriced? An Analysis of the French Market

We investigate the pricing of convertible bonds on the French convertible bond market using dailymarket prices for a period of 18 months. Instead of a firm-value model as used in previous studies, weuse a stock-based binomial-tree model with exogenous credit risk that accounts for all importantconvertible bond specifications and is therefore well suited for pricing convertible bonds. Theempirical analysis shows that the theoretical values for the analyzed convertible bonds are on averagemore than three percent higher than the observed market prices. This result applies to both thestandard convertibles and the exchangeable bonds in our sample. The...