The Study Of Pricing China's Convertible Bonds

This thesis analyzes convertible bonds'pricing theoretically and empirically. Wetest whether issuing, going to the market and conversing of convertible bonds impactthe underlying equity's price and volatility. Also, we study the formation ofconvertible bonds'basic value, the value of additional provisions, the dilution rate forunderlying equity value when conversing and the choice of the best pricing model. Tosolve the problems, which appear in the pricing when using traditional model, wecorrect the pricing model with short-sale constraints model and time-varying volatility.Moreover, analyzing the error series of pricing, we gain the characteristics and factorsof pricing errors and convertible bonds'market returns. The conclusions are that the announcement effects of convertible bonds'issuing isnot significant, but going to market and conversing impacts the underlying equity'sprice very significantly. There exist the effect of dilution. The change of underlyingequity's volatility is not due to the issuing and conversing of convertible bonds. Basic value of convertible bond includes three parts, bond's value, warrant's valueand bond forward's value. Dilution rate when conversing should be the dilution rate ofequity ration. In Chinese market, TF98 model, which doesn't base on firm's marketvalue but on equity price, may be the best choice. We find that, generally, market price is lower than model price and pricing errorchanges with conversion value when using traditional pricing model. Also, short-saleconstraint is one factor of these phenomenons. When using correct model with short-sale constraint and time-varying volatility,market price of convertible bond is lower slightly than model price. There aresystematical pricing errors. Market price and model price are not cointegrative, butthe model price is the Granger cause of market price. The factors of the errors andmarket returns are the delay of market returns, model returns, underlying equityreturns and liquidity. Market equilibrium exists yet even if hedging is impossible, butthere exist viscosity in market. Correcting pricing model with these factors is veryeffective.