Behavioral Factors in the Pricing of Financial Products



We study the pricing of reverse convertible bonds. These are bonds that carry high coupon payments. In exchange, the issuer has an option at the maturity date to either redeem the bonds in cash, or to deliver a pre-specified number of shares. We find, on average, a significant overpricing of 23%. This overpricing is confirmed in a model-free analysis. Using a financial experiment we find that two behavioral factors, framing and cognitive errors, partly explain this overpricing. An analysis of the pricing data provides a confirmation for the existence of cognitive errors. For more information mail to Paper download