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The Barra/Nikko Japanese Convertible Bond Model
Jul 1, 1993
This paper provides a look at the theoretical underpinnings of Barra's Nikko/Japanese Convertible Bond Model. The model begins with the Barra/Nikko Japanese Government Bond (JGB) Model and the Black-Scholes stock option model, and empirically extends these models to fit the observed features of the Japanese CB market. The empirical extensions include a model of corporate bond yield spread, a model of CB implied volatility dependent on parity and maturity, and an explicit liquidity premium. The Barra/Nikko Japanese Convertible Bond Model is easy to use, even though its quantitative components are quite sophisticated and complex.