Abstract

This paper applies the option pricing theory to examine the price behavior of preferred stocks in Taiwan Stock Market. Using regression analysis, this paper further explores the factors that may explain the differences between the market prices and the theoretical values of preferred stocks. Major findings include: 1. The differences between the preferred stock prices and the theoretical values are greater in bull market, and are smaller in the bear market. 2. The conversion values of the convertible preferred stocks are deeply affected by the underlying common stock prices. When the time to maturity approaches infinity, the conversion value of the preferred stock approximates the common stock price. 3. Under three valuation methods: (1) the Black-Scholes option pricing model, (2) shortening the effective period of conversion rights, and (3) the pseudo-American call method, the empirical results are similar in the directions and trends of the differences between the market prices and the theoretical values. The results of the regression analysis show that "Trading Volume of Preferred Stocks" and "Weighted Stock Price Index" affect the differences between the market prices and the theoretical values.