An Empirical Research On The Pricing Of The Convertible Bonds Market In China

The pricing of Convertible Bonds(CB) is more and more important to the issuers and the investors. The overpricing or underpricing of CB will affect the financing cost to issuers and the profit of the investors. The CB maket of China is developing quickly nowadays. It is necessary to choose a suitable model to CB pricing of Chinese market .There have much research on the pricing of Convertible Bonds in China. But in my opinion, there are three main shortages of these papers. Firstly, the academically papers apply mechanically of the model of other developed countries, which is not suit to China. Secondly, most of the research reports of stockjobbers use qualitative analysis to determine the invest value of the Convertible Bonds. Thirdly, according to the recent empirical research, the CBs chosed to be studied is too single, lack of the study of the whole CB market of China. In addition, the range of the data is too short, just from several days to several months, so the result is not persuasive.Because of the above limitation, the paper introduces the concept of CB,how the CB is issued and the ways to trade in Chinese market. Comparing with the aboard CB market, we found that the limitation of CB market of China is brought by the macroecnomic environment. After that, the paper introduces two simple models to price the CB. In order to pricing CB accurately, we use the value equation of CB. Another common model is binominal model. Because of its simpleness and precision, binominal model is widely acceptable by the market participators.On basis of the general analysis of CB pricing, the paper then studies the commonness and the speciality of the trading CBs of Chinese market. Compared to the clauses of the CBs, we can determine the primary invest strategies. The paper gives the examples of how to realize the pricing programme by computer of the main models adopted by participators.The last and main part of the paper studies the CB market of China by collecting the actual data from July 2003 to July 2004. There are three model value of CB,the value supported by webside of Homeway, the value by component model and the value by binomial model. The result shows there is no evidence to prove the existing of arbitrage opportunity. The value by binomial model is the closest value to actual market value, especially to the In-the-money CBs.In one word, the main reseach in the paper are concluded as the following:Firstly, the paper considers the whole convertible bond market in China. Because the empiral research in China are mostly focused on one or two CB, but lack of the analysis of the whole market, the paper chooses the 22 different kinds of business and liquidity to be the objects of the study. Accoding to the different issues of the CBs, the paper gets the valuable invest stratege. The conclution is useful for the issuers and the investors.Secondly, the paper adopts the improved binomal model. The development is mainly the way to decide the volatility, the discount rate and the riskfree rate.Then studies the CB market of China by collecting the actual data of the recent one year by use the improved model. The result shows that the new model can fit the actual data better. On realizing the model, the paper chooses the more practiceful software, Matlb, instead of the Excel.Thirdly, the paper analysis the bias of the pricing by the comparsion of three different models. The result shows that the bias of the binomal model is smallest and the whole CB market in China is not be overpricing or underpricing. The result means that there are uncertain risk in the market of China. In addition, the paper gives some useful advice to reduce the bias.