A partial equilibrium valuation model for a security, based on the idea of contingent claims analysis, was first developed by Black & Scholes. The model was considerably extended by Herton, who showed how the approach could be used to value liability instruments. Valuation models for default-free bonds, by treating them as contingent upon the value of the instantaneously riskfree interest rate, have been developed by Cox, Ingersoll & Ross, Brennan & Schwartz, Vasicek and Richards. There has, however, not been much attention directed towards the empirical testing of these valuation models of default-free bonds. This research is an attempt in that direction. Our attention is confined to retractable and extendible bonds. Central to arriving at any equilibrium model of bond valuation is the assumption about the instantaneously riskless interest rate process, since the bond value is treated as contingent upon it. These bond valuation models are partial equilibrium models, since the interest rate is assumed as exogenous to them. The choice of the interest rate process is made subject to some restrictions on its behaviour which are based on expected properties of interest rates. The interest rate process adopted in this study is a generalization of that used by Vasicek and Cox, Ingersoll & Ross., The properties of the chosen mathematical model are investigated to ascertain whether it conforms to those expected of an interest rate process based on economic reasoning. We go on to develop alternate estimation methods for the parameters of the interest rate process, using data on a realization of the process. One "exact" method and two others based on approximations are outlined. It is observed that the "exact" method is not available to the complete family of processes included in the continuous time stochastic specification assumed to model interest rates. The asymptotic properties of the estimators from the "exact" method are known from the existing literature. However, since we would have to adopt one of the approximate methods, we need to know something about the properties of the estimators based on these approaches. This could not be derived analytically and so a Monte Carlo study is conducted. The results seem to indicate that the properties of the estimators from the three methods are not very different. The yield to maturity on 91-day Canadian Federal Government Treasury bills, on the date of issue, is chosen as the proxy for the instantaneously riskfree interest rate. The impact of using such a proxy is briefly investigated and found to be negligible. The bond sample chosen is the complete issues of retractable and extendible bonds made by the Government of Canada. There were 20 issues between January 1959 and October 1975, and weekly prices on all these bonds are available in the Bank of Canada Review. To arrive at the final bond valuation equation, some assumptions are made about the term structure of interest rates. This study first assumes a form of the pure expectations hypothesis and it is shown that the performance of the model in predicting market price movements, is considerably improved when we assume a specific form of term/liquidity preference on the part of investors. Incorporating taxes into the model results in similar improvements. The hypothesis that the bond market is efficient to information contained in these models is tested and not rejected. Finally, an ad hoc regression based model is developed to serve as a bench mark for evaluating the performance of the partial equilibrium models. It is observed that these models perform atleast as well as the ad hoc model, and could be improved by relaxing some of the restrictive assumptions made. / Business, Sauder School of / Graduate

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Leong U Man. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2006. / Includes bibliographical references (leaves 32-34). / Abstracts in English and Chinese. / Chapter 1 --- Introduction --- p.1 / Chapter 2 --- Structural Bond Pricing Models --- p.5 / Chapter 2.1 --- The Merton Model --- p.5 / Chapter 2.2 --- Extended Merton Model --- p.6 / Chapter 2.3 --- Longstaff and Schwartz Model --- p.8 / Chapter 3 --- Methodology --- p.11 / Chapter 3.1 --- Maximum Likelihood Estimation --- p.13 / Chapter 3.2 --- Non-linear Filtering Process --- p.13 / Chapter 3.3 --- Modification for LS Model --- p.15 / Chapter 4 --- Simulation and Empirical Analysis --- p.16 / Chapter 4.1 --- Simulation Study --- p.16 / Chapter 4.2 --- Empirical Analysis --- p.19 / Chapter 4.2.1 --- Bond Selection --- p.19 / Chapter 4.2.2 --- Result for EM Model --- p.21 / Chapter 4.2.3 --- Result for LS Model --- p.24 / Chapter 4.3 --- Implications from Empirical Analysis --- p.28 / Chapter 5 --- Conclusion --- p.30 / Bibliography --- p.32

In the first part, we propose a non-zero-sum stochastic game approach of pricing convertible bond under the framework that the capital structure of the firm involves tax rebate and endogenous default policy. Convertible bond is a hybrid security which embodies characteristics of both straight bond and equity. Beyond the bond provisions, it endows a conversion option for the bondholder to convert the bond for the equity of the issuing firm and a call option for the firm to buy the debt back. The conflict of interests between bondholder and shareholder affects the security prices significantly. In Chapter 2, we investigate how to use a non-zero-sum game framework to model their interaction and to evaluate the convertible bond accordingly. Mathematically, this problem can be reduced down to a system of variational inequalities. After we clarify the structure of the optimal exercise region of both parties, we manage to explicitly derive a unique Nash equilibrium to the constraint game and specify the associated optimal exercise strategies. Our model shows that tax benefit and credit risk can produce considerable impact on the optimal strategies of both parties. The firm may issue a call when the debt is out-of-the-money or in-the-money. This is consistent with the empirical findings of "late and early calls" (Ingersoll (1977), Mikkelson (1981), Cowan et al. (1993) and Ederington et al. (1997)) . In addition, the optimal call policy under our model offers an explanation to some stylized patterns related to the returns of the company value as well. / In the second part, we use Laplace transform to study the pricing problems of various path-dependent exotic options with the underlying asset following an exponentially distributed jump diffusion process. These exotic options include double-barrier option and some occupation-time-related derivatives such as step options, corridor options, and quantile options. The result about double barrier options is presented in Chapter 3, where we prove non-singularity of a related high-dimensional matrix, which guarantees the existence and uniqueness of the solution. Chapter 4 is our work on occupation-time-related options, which presents an extension of the Black-Scholes setting to Kou's double-exponential jump diffusion model. We derive the closed-form Laplace transform of the joint distribution of the occupation time and the terminal value of the double-exponential jump diffusion process, and apply the result to price various occupation-time-related derivatives. This is done by solving the associated two correlated ordinary integro-differential equations, thanks to the special property of the exponential. All the Laplace transform-based analytical solutions can be inverted easily via Euler Laplace inversion algorithm, and the numerical results illustrate that our pricing methods are accurate and efficient. / Key words. Convertible Bond; Non-zero-sum Differential Game; Tax Benefit; Credit Risk; Early/Late Calls; Positive/Negative Stock Return; Double-barrier Options; Step Options; Corridor Options; Quantile Options; Occupation-Time; Jump-Diffusion Process. / This dissertation contains two parts: a non-zero-sum game approach of convertible bond and exotic options pricing under exponential-type jump-diffusion model. / Wan, Xiangwei. / Adviser: Nan Chen. / Source: Dissertation Abstracts International, Volume: 72-04, Section: B, page: . / Thesis (Ph.D.)--Chinese University of Hong Kong, 2010. / Includes bibliographical references (leaves 157-170). / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. Ann Arbor, MI : ProQuest Information and Learning Company, [200-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Abstract also in Chinese.

Thesis (MDF)--Stellenbosch University, 2015. / ENGLISH ABSTRACT: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan It is widely publicised that inflation-linked instruments provide a hedge against rising inflation. This has led investors to assume that high inflation creates an opportunity to beat the market when investing in this asset class. This assumption is based on the belief that higher inflation creates higher returns. It is due to this belief that a research question was formulated to determine if inflation is in fact a determinant of inflation-linked bond returns. This research study investigated, as a first objective, the relationship between the South African prime lending interest rate and the South African consumer price index inflation between 2000 and 2013. The Augmented Dickey-Fuller test was applied to test for unit roots between interest and inflation. This test was extended to six other emerging countries that, together with South Africa, are issuers of government inflation-linked bonds. The researcher’s intention was to compare the relationship between interest rates and inflation in South Africa with that of the six other countries. Surprisingly, the results indicated that South African inflation and interest are non-stationary. After testing for cointegration, it was concluded that there is no relationship between the prime lending interest rate and inflation in the data set and most of the variation can be explained by means of the autocorrelation of residuals in previous periods more than the prime lending rate. As a second objective, the same methodology was applied to determine whether there is any relationship between the South African consumer price index inflation and the South African government inflation-linked bond returns. The results indicated that the series is not cointegrated which means that no relationship exists between inflation and inflation-linked bond returns. The third objective looked at alternative factors that could explain what the real determinants of inflation-linked bond returns are. It was concluded that the trend in inflation is really the source of inflation-linked bond performance, with the effects of the lead and lag periods causing capital losses and profits.

by Tse Kwok-fai, Sammy, Wong Kin-fai, Kelvin. / Thesis (M.B.A.)--Chinese University of Hong Kong, 1995. / Includes bibliographical references (leaf 46). / TABLE OF CONTENTS --- p.i / LIST OF TABLES / FIGURES --- p.ii / Chapter / Chapter I. --- INTRODUCTION --- p.1 / Chapter II. --- MARKET STRUCTURE --- p.4 / Chapter III. --- PRODUCT TYPES --- p.11 / Chapter IV. --- BASIC ELEMENTS AFFECTING BONDS PRICING --- p.18 / Chapter V. --- BONDS PRICING MODELS --- p.25 / Chapter VI. --- FACTORS LIMITING BONDS MARKET GROWTH --- p.34 / Chapter VII. --- PROSPECTS --- p.40 / Chapter VIII. --- CONCLUSION --- p.43 / BIBLIOGRAPHY --- p.46

by Matthew Bailey Greenberg, Ng Hin Wah. / Thesis (M.B.A.)--Chinese University of Hong Kong, 1998. / Includes bibliographical references (leaves 61-62). / ABSTRACT --- p.ii / TABLE OF CONTENTS --- p.iv / Chapter / Chapter I. --- INTRODUCTION --- p.1 / Chapter II. --- CONVERTIBLE BONDS AND WARRANTS --- p.3 / ConvertIBle Bonds --- p.3 / Value At Maturity --- p.5 / Value Before Maturity --- p.6 / Warrants --- p.8 / The Difference Between Convertible Bonds and Warrants --- p.11 / Considerations of Issuing Convertibles and Bond with Warrants --- p.13 / Valuation of Convertible Bond --- p.15 / Valuation of Warrants --- p.18 / Chapter III. --- CALLABLE BONDS --- p.20 / Performance Characteristics of Callable Bonds --- p.21 / Valuation of a Two-year Callable Bond with the Salomon Brothers Model --- p.22 / Valuation of a Three-year Callable Bond with the Salomon Brothers Model --- p.25 / Step1: Determination of ru and rd --- p.27 / "Step 2: Determination of ruu, rud and rdd " --- p.28 / "Black, Derman & Toy Model (BDT) " --- p.30 / Step 1: Determination of ru and rd --- p.31 / "Step 2: Determination of ruu, rud and rdd " --- p.32 / Chapter IV. --- SINKING-FUND BONDS --- p.37 / Advantages for the Investor --- p.38 / Disadvantages for the Investor --- p.38 / Methods Used by Issuers for Early Bond Redemption --- p.39 / Valuation of Non-callable Sinking Fund Bonds --- p.40 / Valuation of Callable Sinking Fund Bond --- p.45 / Chapter V. --- VALUATION OF A CALLABLE BOND BY A COMPUTERIZED PROGRAM… --- p.47 / System requirements --- p.48 / Opening the program file --- p.48 / Manual for using the program --- p.48 / Construction of Interest Rate Tree --- p.48 / Valuation of a Callable Bond --- p.50 / APPENDIX --- p.55 / BIBLIOGRAPHY --- p.61

Huang Ming Xi = 三因結構模型之公司債劵定價及其應用 / 黃銘浠. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2003. / Includes bibliographical references (leaves 99-102). / Text in English; abstracts in English and Chinese. / Huang Ming Xi = San yin jie gou mo xing zhi gong si zhai quan ding jia ji qi ying yong / Huang Mingxi. / Abstract --- p.i / Acknowledgements --- p.iii / Contents --- p.iv / List of Figures --- p.vii / List of Tables --- p.xiii / Chapter Chapter 1. --- Introduction --- p.1 / Chapter Chapter 2. --- Structural Models of Credit Pricing --- p.3 / Chapter 2.1 --- Introduction --- p.3 / Chapter 2.2 --- Merton's Model (1974) --- p.4 / Chapter 2.2.1 --- The Framework of the Traditional Contingent Claims Analysis (CCA) --- p.5 / Chapter 2.2.2 --- The Valuation of Corporate Bonds with B-S Option Pric- ing Theory --- p.9 / Chapter 2.2.3 --- The Limitations of Traditional Contingent Claim Ap- proach --- p.12 / Chapter 2.3 --- "Shimko, Tejima and Deventer (1993)" --- p.15 / Chapter 2.3.1 --- The Merton's Model in a Stochastic Interest Rate Frame- work --- p.15 / Chapter 2.4 --- Longstaff and Schwartz (1995) --- p.17 / Chapter 2.4.1 --- A Structure Model of Early Default Mechanism and De- viations from APR --- p.17 / Chapter 2.5 --- Briys and de Varenne (1997) --- p.21 / Chapter 2.5.1 --- A Structure Model of Stochastic Default Barrier --- p.21 / Chapter 2.5.2 --- The Valuation of Risky Zero-Coupon Bonds --- p.22 / Chapter 2.6 --- Stationary-leverage-ratio Models --- p.25 / Chapter 2.6.1 --- Tauren (1999) --- p.25 / Chapter 2.6.2 --- Collin-Dufresne and Goldstein (2001) --- p.27 / Chapter 2.7 --- Summary --- p.29 / Chapter Chapter 3. --- The Valuation Framework of the Three-factor Model --- p.32 / Chapter 3.1 --- Introduction --- p.33 / Chapter 3.2 --- The Framework of the Three-factor Model --- p.35 / Chapter 3.3 --- The Valuation of Risky Bonds --- p.39 / Chapter 3.3.1 --- Imposing an Early Default Mechanism --- p.42 / Chapter 3.3.2 --- Application: The Valuation of Probability of Default --- p.45 / Chapter Chapter 4. --- The Pricing Methodology of the Three-factor Model --- p.46 / Chapter 4.1 --- Simplification of the Problem --- p.47 / Chapter 4.2 --- Methodology of Upper-lower Bound Scheme --- p.48 / Chapter 4.2.1 --- Single-stage Approximation --- p.48 / Chapter 4.2.2 --- Illustrative Examples --- p.53 / Chapter 4.2.3 --- Multistage Approximation --- p.54 / Chapter 4.2.4 --- Summary --- p.58 / Chapter 4.2.5 --- Systematic Multistage Estimation of Bond Price --- p.61 / Chapter 4.3 --- Estimation of Default Probability --- p.63 / Chapter Chapter 5. --- Numerical Results and Discussion --- p.69 / Chapter 5.1 --- Initial Setting of Parameters --- p.69 / Chapter 5.2 --- Numerical Results and Discussion --- p.74 / Chapter Chapter 6. --- Conclusion --- p.89 / Appendix A. The Derivation of the Three-Factor Model --- p.91 / Bibliography --- p.99

by Chan Hoi-ying. / Thesis (M.B.A.)--Chinese University of Hong Kong, 1995. / Includes bibliographical references (leaves 44-45). / ABSTRACT --- p.iii / TABLE OF CONTENTS --- p.iv / LIST OF ILLUSTRATIONS --- p.vi / LIST OF TABLES --- p.vii / ACKNOWLEDGMENTS --- p.viii / CHAPTER / Chapter I. --- INTRODUCTION --- p.1 / Scope of Study --- p.2 / Approach of Study --- p.3 / Chapter II. --- DEVELOPMENT OF CORPORATE BONDS IN HONG KONG --- p.4 / The History of Hong Kong Bond Market --- p.4 / The Reasons for Low Bond Activity Before 1991 --- p.6 / The Growth of the Bond Market after 1991 --- p.6 / The Exchange Fund Bills and Notes --- p.7 / The Liquidity Adjustment Facility --- p.8 / The Central Moneymarket Unit --- p.9 / The Rise of Corporate Issuers and Investors --- p.10 / Chapter III. --- TYPES OF CORPORATE BONDS --- p.14 / Eurobonds --- p.14 / Euroconvertible Bonds --- p.16 / Yankee Bonds --- p.18 / Hong Kong Dollar Bonds --- p.21 / Chapter IV. --- DIFFERENT WAYS TO VALUE CORPORATE BONDS --- p.25 / Theoretical Pricing of Bonds Using Option Pricing Model --- p.25 / Black and Scholes Option Pricing Model --- p.26 / Using Black and Scholes Model for Pricing Corporate Bonds --- p.27 / Using Black and Scholes Model for Pricing Convertible Bonds --- p.29 / Pricing of Corporate Bonds in Practice --- p.32 / Credit Rating --- p.32 / Yield --- p.34 / Supply and Demand --- p.35 / Market Sentiments --- p.35 / Conclusion --- p.36 / Chapter V. --- WHEN TO ISSUE EACH TYPE OF BOND --- p.37 / Eurobonds --- p.37 / Euroconvertible Bond --- p.38 / Yankee Bonds --- p.39 / Hong Kong Dollar Bonds --- p.39 / Chapter VI. --- FUTURE OF CORPORATE BONDS --- p.41 / Further Development of the Hong Kong Dollar Bonds --- p.41 / Prospects for Corporate Bonds in Overseas Bond Market --- p.42 / BIBLIOGRAPHY --- p.44

The world bond market is nearly twice as large as the equity market. The goal of this dissertation is to study the dynamics of bond price. Among the liquidity risk, interest rate risk and default risk, this dissertation will focus on the liquidity risk and trading strategy. Under the mathematical frame of stochastic control, we model price setting in U.S. bond markets where dealers have multiple instruments to smooth inventory imbalances. The difficulty in obtaining the optimal trading strategy is that the optimal strategy and value function depend on each other, and the corresponding HJB equation is nonlinear. To solve this problem, we derived an approximate optimal explicit trading strategy. The result shows that this trading strategy is better than the benchmark central symmetric trading strategy.