A reduced pricing model for mezzanine financing based on options and support vector machines

Abstract

The correlations between financial variables are always nonlinear and the financial instruments with several influence factors are therefore characteristized with complicated risk-return. Thus, this paper attempts to decompose the mezzanine financing into three parts to conveniently value them respectively. In order to dispose complicated relationship between variables during valuation, the support vector machine is introduced to give a nonparametric estimation of the equity embedded in the mezzanine financing. Therefore, a quantitative analysis framework for the valuation of the mezzanine financing is constructed to deal with the dual risk-return nature of both equity and debt of mezzanine financing. Experimental results display the proposed methodology can efficiently address sophisticated risk-return nature of mezzanine financing and deal with nonlinear dynamics embedded in sample data, which provides investors, issuers and regulators with constructive decision-making basis.