Research On Multi-factor Theoretical Pricing Model And Numerical Simulation Technology For Convertible Bond And Empirical Study

With the high degree of global trade liberalization and the world regional economic integration frequent, more enterprises and investors tend to international financing and investment. As a major international financing and investment instruments, the pricing issue of convertible bonds is a common focus of the academic and the practice.Convertible bond pricing issues related to a variety of complex factors, have characteristics of uncertainty, nonlinear and exotic. The valuation and the numerical implementation of convertible bonds under the risk of stock price, credit, interest rate and exchange rate is the important problem in current financial engineering research. A deep study on multi-factor convertible bond pricing models and numerical implementation techniques is conceded in this paper. This paper first built a valuation model for convertible bonds considering complex provisions, derive the finite element numerical algorithm for the pricing model, and analyze the impact of interest rate, conversion terms, call notice period, hard and soft call constraints on the optimal strategies of issuer and holder. Secondly, most of the existing pricing models for convertible bond are one-factor or two-factor models, which can't consider the impact of interaction of multiple factors on the value of convertible bonds, the results have certain limitations. Based on the no-arbitrage principle, taking credit risk and the main provisions into account, a multi-factor valuation model of convertible bond including the stock price, interest rate and exchange rate as underlying state variables is built, and the corresponding terminal conditions and boundary conditions are presented. Finite element numerical simulation technology is applied to solve the pricing model. The impacts on the convertible bond value put by the changes in stock prices, interest rate and exchange rate are discussed through a numerical example. Forethermore, using a simple linear correlation coefficient to describe the relationship between the factors may cause a model error, giving a misestimated value of the convertible bond. In the multivariate case, the lognormal density also imposes a potentially unrealistic dependence on the underlying assets. Considering the characteristics of convertible bonds, a multi-factor valuation model of convertible bond is built based on the copula dependence structure. The numerical solving steps for four special Archimedes copula function are presented, the impacts on the convertible bond value put by different copula function are discussed through numerical simulation example.Finally, two empirical studies are presented with the convertible bonds that have been called in Chinese convertible bond markets. With the limitation of samples, the call strategies and effect of call announcement in Chinese convertible bond market have never been studied. This paper gives two contributions in this research fields. First, based on the convertible bond pricing and strategy analysis model proposed in this paper, the optimal strategies of the issuer and holders in Chinese convertible bond market are analyzed, and the theoretical results and the actual call results are compared. Second, the effect of call announcement in Chinese convertible bond market is tested, and then a cross-section analysis of the cumulative abnormal returns is carried on to ascertain whether there is empirical support for the liquidity hypothesis, the asymmetric information hypothesis, or both. Both these two empirical studies have valuabe conclusion, which will give scientific supports to the development of convertible bond market in our country.