TAILIEUCHUNG - LEARNING FROM EXPERIENCE IN THE STOCK MARKET

For a non-amortizing security, the call option limits price when rates fall. Investors are not willing to pay large premiums if the issuer can redeem the bonds prior to maturity. Many callable securities remain callable past the initial call date. For example, the issuer of a five-year bond callable in two years, often referred to as “five, non-call two”, may typically call the bond at the end of two years, or on any coupon payment date thereafter, if the option is Bermudan. Investors need to understand all possible dates that issuers can call their bonds. | EUROPEAN CENTRAL BANK EUROSYSTEM NO 1396 I NOVEMBER 2011 WORKING PAPER SERIES LEARNING FROM EXPERIENCE IN THE STOCK MARKET by Anton Nakov and Galo Nuno EUROPEAN CENTRAL BANK EUROSYSTEM In 2011 all ECB publications feature a motif taken from the 100 banknote. WORKING PAPER SERIES NO 1396 I NOVEMBER 2011 LEARNING FROM EXPERIENCE IN THE STOCK MARKET 1 by Anton Nakov 2 and Galo Nuno 3 NOTE This Working Paper should not be reported as representing the views of the European Central Bank ECB . The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from http or from the Social Science Research Network electronic library at http abstract_id 1949793. We are grateful for comments and suggestions to Gunter Coenen John Roberts Alistair Dieppe Oliver de Groot Alessio Moro Giulio Nicoletti Miguel Angel Iraola and seminar participants at ECB University of Surrey and University of Cagliari and conference participants at SCE 2011. 2 European Central Bank Kaiserstrasse 29 60311 Frankfurt am Main Germany e-mail . 3 Banco de Espana Alcala 48 28014 Madrid Spain. European Central Bank 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone 49 69 1344 0 Internet http Fax 49 69 1344 6000 All rights reserved Any reproduction publication and reprint in the form of a different publication whether printed or produced electronically in whole or in part is permitted only with the explicit written authorisation of the ECB or the authors. Information on all of the papers published in the ECB Working Paper Series can be found on the ECB s website http www. pub scientific wps date html ISSN 1725-2806 online

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