Title（标题）：A Non-Zero-Sum Game Approach to Convertible Bonds: Tax Benefit, Bankrupt Cost and Early/Late Calls

Speaker（汇报人）：Assistant Professor Chen Nan

The Chinese University of Hong Kong

Time（功夫）：2010年10月28日（周四）下午2:00-3:00

Place（地址）：拉斯维加斯9888新楼217教室

Abstract（提要）：Convertible bonds are hybrid securities that embody the characteristics of both straight bonds and equities. The conflict of interests between bondholders and shareholders affects the security prices significantly. In this paper, we investigate how to use a non-zero-sum game framework to model the interaction between bondholders and shareholders and to evaluate the bond accordingly. Mathematically, this problem can be reduced to a system of variational inequalities. We explicitly derive a Pareto-optimal Nash equilibrium to the game. Our model shows that credit risk and tax benefit have considerable impacts on the optimal strategies of both parties. The shareholder may issue a call when the debt is in-the-money or out-of-the-money. This is consistent with the empirical findings of ``late and early calls" (Ingersoll (1977), Mikkelson (1981), Cowan et al. (1993) and Asquith (1995)). In addition, the optimal call policy under our model offers an explanation for certain stylized patterns related to the returns of company assets and stock on calls.

This is a joint work with Dai Min and Xiangwei Wan.

About the speaker（汇报人介绍）：Professor Chen Nan graduated from the Department of Probability and Statistics at Peking University in 1998, and he received his Master of Science degree in Probability and Statistics in 2001 at Peking University, his Master of Philosophy and Ph. D degrees in 2006 at Columbia University, USA. He joined the Department of System Engineering and Engineering Management at the Chinese University of Hong Kong in 2006.

http://www.se.cuhk.edu.hk/people/nchen.html