Bridge over ocean
1 September 1995 Financial Analysts Journal Volume 51, Issue 5

Factor and Spread Analysis of the Convertible Securities Market

  1. Takis D. Sparaggis

Factor decomposition demonstrates that during certain time periods, the convertible market has offered excess returns over a well-allocated bond/equity portfolio. Moreover, because the magnitude of these returns spans a wide range of values, investors can use this valuation framework as a tool for estimating the relative attractiveness of convertibles compared with their underlying equity and fixed-income components. Analysis of yield spreads demonstrates the changing nature of valuation levels embedded in convertible securities. A factor analysis of a market-weighted equity index underlying convertibles shows that their equity component is well diversified across two major dimensions—value versus growth and large-cap versus small-cap.

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